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 short- and 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.