Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123779
Authors: 
Byun, Sungje
Jo, Soojin
Year of Publication: 
2015
Series/Report no.: 
Bank of Canada Working Paper 2015-34
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.
Subjects: 
Econometric and statistical methods
International topics
Domestic demand and components
JEL: 
E22
D80
C22
C23
Document Type: 
Working Paper

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