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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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    References listed on IDEAS

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    Cited by:

    1. Choi, Sangyup & Furceri, Davide & Huang, Yi & Loungani, Prakash, 2018. "Aggregate uncertainty and sectoral productivity growth: The role of credit constraints," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 314-330.
    2. Youngju Kim & Seohyun Lee & Hyunjoon Lim, 2019. "Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data," Working Papers 2019-25, Economic Research Institute, Bank of Korea.
    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.
    4. 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.

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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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