Sector-Specific Volatility Patterns in Investment

Matthias Kredler
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Matthias Kredler: New York University

Macroeconomics from EconWPA

Abstract: This paper addresses the question if there are differences between time patterns in the volatility of investment across different industrial sectors. A competitive partial-equilibrium model with quadratic adjustment costs in investment and a GARCH demand shock is developed to predict aggregate investment in a sector. It is shown that under the assumptions made in the model, the GARCH property is inherited by the aggregate investment process in the rational-expectations equilibrium. The equation for investment from the model is estimated on quarterly time series from six industrial sectors in the UK. As conjectured, GARCH effects play an important role in some sectors but are not significant in others. Astonishingly, the volatility patterns are in general very different across sectors. This suggests that sector-specific factors are more important in determining investment volatility than the macroeconomic environment.

Keywords: investment; volatility; variance; GARCH; ARCH; sector (search for similar items in EconPapers)
JEL-codes: E22 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-mac
Date: 2005-01-12
Note: Type of Document - pdf; pages: 15
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