Firm Investment and the Term Structure of Uncertainty
Ian Wright ()
Additional contact information
Ian Wright: Stanford University
No 15-014, Discussion Papers from Stanford Institute for Economic Policy Research
Why has firm activity been slow to recover from the Great Recession? I present theoretical and empirical evidence suggesting long-term uncertainty may be one reason. Specifically, I show the current level of uncertainty and expectations of future uncertainty â€“ that is, the entire term structure of uncertainty â€“ are negatively correlated with firm investment rates. I present a simple model generating these effects through real options channels. Using equity options to obtain forward-looking estimates of firm and aggregate uncertainty at different horizons, I then show that both the level and slope of the term structure of uncertainty have negative conditional correlations with capital investment rates, consistent with the model. Numerically, a one standard deviation increase in firm (aggregate) uncertainty over the next year relative to the next 30 days correlates with a decrease in firm capital investment equal to 3.1% (4.4%) of the mean firm investment rate over the next quarter. I also find the correlation between both short- and long- term uncertainty and R&D to be positive, supporting the theory that firms invest in growth options in the face of uncertainty. I discuss identification in this context and the particular relevance of my findings for government policy.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www-siepr.stanford.edu:80 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:sip:dpaper:15-014
Access Statistics for this paper
More papers in Discussion Papers from Stanford Institute for Economic Policy Research Contact information at EDIRC.
Bibliographic data for series maintained by Anne Shor ( this e-mail address is bad, please contact ).