Skip to main content
SpringerLink
Log in

Is interest rate uncertainty a predictor of investment volatility? evidence from the wild bootstrap likelihood ratio approach

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

This paper investigates the ability of interest rate uncertainty to predict investment volatility in nine selected countries. Employing a novel wild bootstrap likelihood ratio approach, the study shows interest rate uncertainty to be a significant predictor of investment volatility in all but one of the sampled countries. Overall, we find that interest rate uncertainty aggravates investment volatility in the United States, Germany, France, Italy, Spain, United Kingdom, Japan and Sweden. The results remain the same irrespective of whether a 3-month forecast horizon or a 12-month forecast horizon is used. The implication of the study finding is that the current value of investments more often than not fluctuates in response to uncertain interest rate changes. This suggests that the investment rate is not only dependent on the interest rate level, but on the degree of uncertainty in interest rate movements as well. Interest rate uncertainty is thus an important factor to be considered in investment analysis. This study thus encourages central banks to pay significant attention to interest rate stability due to its ability to minimize the distortions in the market mechanism for raising long-term capital.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Data availability

Data available upon request from the authors.

Code availability

Code available upon request from authors.

References

  • Aloy M, Dufrénot G, Péguin-Feissolle A (2014) Is financial repression a solution to reduce fiscal vulnerability? The example of France since the end of World War II. Appl Econ 46(6):629–637

    Article  Google Scholar 

  • Alvarez LH, Koskela E (2006) Irreversible investment under interest rate variability: some generalizations. The Journal of Business 79(2):623–644

    Article  Google Scholar 

  • Amir ZB, Zaman T, Ali M (2012) The macroeconomic determinants of investment: empirical evidence from Bangladesh. Int J Sci Eng Res 3(9):1–13

    Google Scholar 

  • Balcilar M, Gupta R, Lee CC, Olasehinde-Williams G (2020) Insurance and economic policy uncertainty. Res Internatl Bus Finance 54:101253

  • Balcilar M, Olasehinde-Williams GO, Shahbaz M (2019) Asymmetric dynamics of insurance premium: the impact of monetary policy uncertainty on insurance premiums in Japan. Internatl J Monetary Econ Finance 12(3):233–247

    Article  Google Scholar 

  • Bano SS (2018) The dynamic relationship between real interest rate and investment: an empirical analysis for selected Pacific Island countries. Int J Econ Financ Issues 8(5):131

    Google Scholar 

  • Berk JB (1999) A simple approach for deciding when to invest. Am Econ Rev 89(5):1319–1326

    Article  Google Scholar 

  • Calcagnini G, Saltari E (2000) Real and financial uncertainty and investment decisions. J Macroecon 22(3):491–514

    Article  Google Scholar 

  • Carmichael DG, Bustamante BL (2014) Interest rate uncertainty and investment value: a second order moment approach. Int J Eng Manag Econ 4(2):176–189

    Google Scholar 

  • Chari VV, Dovis A, Kehoe PJ (2020) On the optimality of financial repression. J Polit Econ 128(2):710–739

    Article  Google Scholar 

  • Clark JM (1917) Business acceleration and the law of demand: a technical factor in economic cycles. J Polit Econ 25(1):217–235

    Article  Google Scholar 

  • Coleman WJ II (1997) Behavior of interest rates in a general equilibrium multisector model with irreversible investment. Macroecon Dyn 1(1):206–227

    Article  Google Scholar 

  • Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74:427–431

    Google Scholar 

  • Dixit A, Pindyck R (1994) Investment under Uncertainty. Princeton University Press, Princeton, NJ

    Book  Google Scholar 

  • Domar E (1946) Capital Expansion, Rate of Growth, and Employment. Econometrica 14(2):137–147

    Article  Google Scholar 

  • Duesenberry J (1958) Business cycles and economic growth. McGraw-Hill, New York

    Google Scholar 

  • Engle RF (1982) Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50(4):987–1007

    Article  Google Scholar 

  • Espinosa-Vega MA, Smith BD (2001) Socially excessive bankruptcy costs and the benefits of interest rate ceilings on loans (No. 2001–27). Working Paper

  • Friedman BM (1982) Federal reserve policy, interest rate volatility, and the US capital raising mechanism. J Money, Credit, Bank 14(4):721–745

    Article  Google Scholar 

  • Grigoli F, Mills Z (2014) Institutions and public investment: an empirical analysis. Economics of Governance 15(2):131–153

    Article  Google Scholar 

  • Griliches Z, Wallace N (1965) The determinants of investment revisited. Int Econ Rev 6(3):311–329

    Article  Google Scholar 

  • Gupta R, Olasehinde-Williams G, Wohar ME (2020) The impact of US uncertainty shocks on a panel of advanced and emerging market economies. J Int Trade Econ Dev 29(6):711–721

    Article  Google Scholar 

  • Harrod RF (1939) An essay in dynamic theory. Econ J 49(193):14–33

    Article  Google Scholar 

  • Ingersoll JE Jr, Ross SA (1992) Waiting to invest: Investment and uncertainty. J Bus 65:1–29

    Article  Google Scholar 

  • Istrefi K, Mouabbi S (2018) Subjective interest rate uncertainty and the macroeconomy: a cross-country analysis. J Int Money Financ 88:296–313

    Article  Google Scholar 

  • Jafarov ME, Maino MR, Pani MM (2019) Financial Repression is Knocking at the Door, Again. International Monetary Fund

  • Jorgenson D (1967) The theory of investment behavior. In Determinants Invest Behav 129–175. NBER

  • Jorgenson DW (1963) Capital theory and investment behavior. Am Econ Rev 53(2):247–259

    Google Scholar 

  • Jorgenson DW (1971) Econometric studies of investment behavior: a survey. J Econ Lit 9(4):1111–1147

    Google Scholar 

  • Keynes JM (1937) The general theory of employment. Q J Econ 51(2):209–223

    Article  Google Scholar 

  • Khurshid A (2015) The effect of interest rate on investment: empirical evidence of Jiangsu Province. China J Internatl Stud 8(1):81–90

    Google Scholar 

  • Kim JH, Shamsuddin A (2020) A bootstrap test for predictability of asset returns. Finance Res Lett 35, 101289

  • Kim JH, Rahman ML, Shamsuddin A (2019) Can energy prices predict stock returns? An extreme bounds analysis. Energy Econ 81:822–834

    Article  Google Scholar 

  • Lee CC, Olasehinde-Williams GO, Olanipekun IO (2020) GDP volatility implication of tourism volatility in South Africa: A time-varying approach. Tourism Econ 1354816620970001

  • Lee CC, Olasehinde-Williams G, Saint Akadiri S (2021) Are geopolitical threats powerful enough to predict global oil price volatility? Environ Sci Pollut Res 28(22):28720–28731

    Article  Google Scholar 

  • Mammen E (1993) Bootstrap and wild bootstrap for high dimensional linear models. Ann Stat 21(1):255–285

    Article  Google Scholar 

  • McKinnon R (1973) Money and Capital in Economic Development. Brookings Institute, Washington, D.C

    Google Scholar 

  • Olanipekun IO, Olasehinde‐Williams G (2021) Unveiling the causal interactions among the US monetary policy uncertainty, exchange market pressure, and FDI‐flows in large emerging market economies. J Public Aff e2684

  • Olanipekun IO, Olasehinde-Williams G, Güngör H (2019) Impact of economic policy uncertainty on exchange market pressure. SAGE Open 9(3):2158244019876275

    Article  Google Scholar 

  • Olasehinde-Williams G (2021) Is US trade policy uncertainty powerful enough to predict global output volatility? J Int Trade Econ Dev 30(1):138–154

    Article  Google Scholar 

  • Panagiotidis T, Printzis P (2021) Investment and uncertainty: are large firms different from small ones? J Econ Behav Organ 184:302–317

    Article  Google Scholar 

  • Pazner EA, Razin A (1974) A model of investment under interest rate uncertainty. Int Econ Rev 15(3):798–802

    Article  Google Scholar 

  • Rahman ML, Shamsuddin A, Lee D (2019) Predictive power of dividend yields and interest rates for stock returns in South Asia: evidence from a bias-corrected estimator. Int Rev Econ Financ 62:267–286

    Article  Google Scholar 

  • Reinhart CM (2012) The return of financial repression. Public debt, monetary policy and financial stability Banque de France. Financ Stab Rev No. 16, April 2012.

  • Reinhart CM, Sbrancia MB (2015) The liquidation of government debt. Econ Policy 30(82):291–333

    Article  Google Scholar 

  • Reinhart CM, Reinhart VR, Rogoff KS (2012) Public debt overhangs: advanced-economy episodes since 1800. J Econ Perspect 26(3):69–86

    Article  Google Scholar 

  • Romer PM (1986) Increasing returns and long-run growth. J Polit Econ 94(5):1002–1037

    Article  Google Scholar 

  • Shaw E (1973) Financial Deepening in Economic Development. Oxford University Press, New York

    Google Scholar 

  • Solow RM (1956) A contribution to the theory of economic growth. Q J Econ 70(1):65–94

    Article  Google Scholar 

  • Stiglitz JE (1989) Financial markets and development. Oxf Rev Econ Policy 5(4):55–68

    Article  Google Scholar 

  • Stiglitz JE (1993) The role of the state in financial markets. The World Bank Econ Rev 7(suppl_1):19–52

  • Stiglitz JE (2000) Capital market liberalization, economic growth, and instability. World Dev 28(6):1075–1086

    Article  Google Scholar 

Download references

Funding

No funding was received for this study.

Author information

Authors and Affiliations

  1. University of Ilorin, Ilorin, Nigeria

    Godwin Olasehinde-Williams

  2. Istanbul Ticaret University, Istanbul, Turkey

    Godwin Olasehinde-Williams

  3. Tokat Gaziosmanpasa University, Tokat, Turkey

    Oktay Özkan

Authors
  1. Godwin Olasehinde-Williams
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Oktay Özkan
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Godwin Olasehinde-Williams.

Ethics declarations

Conflicts of interest

Authors declare no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Olasehinde-Williams, G., Özkan, O. Is interest rate uncertainty a predictor of investment volatility? evidence from the wild bootstrap likelihood ratio approach. J Econ Finan 46, 507–521 (2022). https://doi.org/10.1007/s12197-022-09570-2

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12197-022-09570-2

Keywords

JEL Classification

Search

Navigation