Short and Long Run Uncertainty
55 Pages Posted: 12 Jul 2016 Last revised: 19 Mar 2018
Date Written: March 13, 2018
Uncertainty appears to have both a short-run and a long-run component, which we measure using firm and macro implied volatility data from equity options of 30 days to 5 years duration. We ask what may be driving uncertainty over these different time horizons, finding that policy uncertainty, interest rate volatility, and currency volatility are particularly associated with long-run uncertainty, while oil price volatility and CEO turnover appear to impact short- and long-run uncertainty about equally. Examining a panel of over 4,000 firms from 1996 to 2016 we find that investment is relatively more sensitive to long-run uncertainty than hiring, and about as sensitive to long-run uncertainty as R&D. Investment is also more sensitive to the overall level of uncertainty than both R&D and hiring, holding fixed the relative magnitude of short- versus long-run uncertainty. We investigate the channels underlying these different sensitivies to short- versus long-run uncertainty, and show empirically and in simulations that lower depreciation rates and higher adjustment costs explain why investment is more sensitive to longer-run uncertainty. Collectively, these results suggest that recent events that have raised long-run policy uncertainty may be particularly damaging to growth by reducing investment and R&D.
Keywords: Uncertainty, investment, employment
JEL Classification: D92, E22, D8, C23
Suggested Citation: Suggested Citation