Heterogeneity in the Dynamic Effects of Uncertainty on Investment

Sung Je Byun and Soojin Jo

Staff Working Papers from Bank of Canada

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.

Keywords: Econometric and statistical methods; International topics; Domestic demand and components (search for similar items in EconPapers)
JEL-codes: C22 C23 D80 E22 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015
New Economics Papers: this item is included in nep-bec, nep-ecm and nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Heterogeneity in the dynamic effects of uncertainty on investment (2018)
Journal Article: Heterogeneity in the dynamic effects of uncertainty on investment (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:15-34

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