Uncertainty, Risk, and Capital Growth

Abstract

We find that high macroeconomic uncertainty is associated with greater accumula-tion of physical capital, despite a reduction in investment and valuations. To reconcile this puzzling evidence, we show that uncertainty predicts lower depreciation and uti-lization of existing capital, which dominates the investment slowdown. Motivated by these dynamics, we develop a quantitative production-based model in which firms im-plement precautionary savings through reducing utilization rather than raising invest-ment. 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.

Keywords: Uncertainty, Production, Asset Pricing, Utilization, Depreciation, Equity Premium

JEL Classification: G12, E32, D81, D50