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Heterogeneity in the Dynamic Effects of Uncertainty on Investment

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  • Sungje Byun
  • Soojin Jo

Abstract

How does aggregate profit uncertainty influence investment activity at the firm level? We propose a parsimonious adaptation of a factor-autoregressive conditional heteroscedasticity model to exploit information in a subindustry sales panel for an efficient and tractable estimation of aggregate volatility. The resulting uncertainty measure is then included in an investment forecasting model interacted with firm-specific coefficients. We find that higher profit uncertainty induces firms to lower capital expenditure on average, yet to a considerably different degree: for example, both small and large firms are expected to reduce investment much more than medium-sized firms. This highlights significant and substantial heterogeneity in the uncertainty transmission mechanism.

Suggested Citation

  • Sungje Byun & Soojin Jo, 2015. "Heterogeneity in the Dynamic Effects of Uncertainty on Investment," Staff Working Papers 15-34, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-34
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    Cited by:

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    2. Kim, Youngju & Lee, Seohyun & Lim, Hyunjoon, 2023. "Uncertainty, credit and investment: Evidence from firm-bank matched data," Journal of Banking & Finance, Elsevier, vol. 154(C).
    3. Valeria Arza & Elisa Giuliani & Federica Nieri, 2019. "DRIFTING ON A CALMA CHICHA AFTER COUNTLESS STORMS: How macroeconomic uncertainty affects firms' de cisions to innovate in emerging countries," Discussion Papers 2019/251, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
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    5. Byun, Sung Je, 2016. "The usefulness of cross-sectional dispersion for forecasting aggregate stock price volatility," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 162-180.
    6. Zeng, Ting & Zhao, Wei & Liu, Zhengning, 2022. "Investment response to exchange rate uncertainty: Evidence from Chinese exporters," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 488-505.

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    More about this item

    Keywords

    Econometric and statistical methods; International topics; Domestic demand and components;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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