Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271519 
Year of Publication: 
2023
Series/Report no.: 
SAFE Working Paper No. 388
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
We find that high macroeconomic uncertainty is associated with greater accumulation of physical capital, despite a reduction in investment and valuations. To reconcile this puzzling evidence, we show that uncertainty predicts lower depreciation and utilization of existing capital, which dominates the investment slowdown. Motivated by these dynamics, we develop a quantitative production-based model in which firms implement precautionary savings through reducing utilization rather than raising investment. Through this novel intensive-margin mechanism, uncertainty shocks command a quarter of the equity premium in general equilibrium, while flexibility in utilization adjustments helps explain uncertainty risk exposures in the cross-section of industry returns.
Subjects: 
Uncertainty
Production
Asset Pricing
Utilization
Depreciation
Equity Premium
JEL: 
G12
E32
D81
D50
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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