Uncertainty, risk, and capital growth

  • 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 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.

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Author:Gill SegalORCiD, Ivan Shaliastovich
Series (Serial Number):SAFE working paper (388)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2023
Year of first Publication:2023
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2023/06/09
Tag:Asset Pricing; Depreciation; Equity Premium; Production; Uncertainty; Utilization
Edition:March 2023
Page Number:73
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:D Microeconomics / D5 General Equilibrium and Disequilibrium / D50 General
D Microeconomics / D8 Information, Knowledge, and Uncertainty / D81 Criteria for Decision-Making under Risk and Uncertainty
E Macroeconomics and Monetary Economics / E3 Prices, Business Fluctuations, and Cycles / E32 Business Fluctuations; Cycles
G Financial Economics / G1 General Financial Markets / G12 Asset Pricing; Trading volume; Bond Interest Rates
Licence (German):License LogoDeutsches Urheberrecht