Short- and Long-Run Uncertainty

Uncertainty appears to have both a short-run and a long-run component, which we measure using firm and macro implied volatility data from 30 days to 10 years duration. Examining a panel of over 4,000 firms from 1996 to 2013 we find that investment is significantly more sensitive to long-run uncertainty, while employment responds equally to shortand long-run uncertainty. We build a model to investigate this phenomenon, and find that the higher adjustment costs and lower depreciation rates of capital can explain why investment is particularly sensitive to longer-run uncertainty. This suggests that investment in other long-lived and irreversible capital goods like buildings and intangibles such as R&D and organizational capital will also be particularly sensitive to long-run uncertainty. We then examine drivers of uncertainty over different time horizons, finding oil price volatility is particularly important for short-run uncertainty, policy uncertainty is particularly important for long-run uncertainty, while currency volatility and CEO turnover appear to equally impact short and long run uncertainty. Acknowledgments: We thank seminar participants at Stanford, the 2015 World Congress of the Econometric Society, and the 2016 SED Annual Meeting for helpful comments. We thank the National Science Foundation and SIEPR for providing generous research support. Disclaimer: This paper was written in Ian Wright’s individual capacity and is not related to his role at Goldman Sachs. The analysis, content and conclusions set forth in this paper are those of the authors alone and not of Goldman Sachs & Co. or any of its affiliate companies. The authors alone are responsible for the content.