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BY 4.0 license Open Access Published by De Gruyter Open Access November 23, 2009

Heterogeneous Parameter Uncertainty and the Timing of Investment during Crisis

Shawn Ni EMAIL logo and Ronald A. Ratti
From the journal Economics

Abstract

We present a model in which investors observe the same macroeconomic data but have varying levels of information about the parameters that determine the distribution of the expected returns on investment. During a crisis that increases macroeconomic uncertainty and reduces asset prices, the threshold required return that triggers investment is lower for an informed investor than for an uninformed investor. Simulation of the model suggests that when macroeconomic uncertainty is high investment may increase, is mostly by informed investors, and as time goes on is progressively more by investors who were initially relatively uninformed about model parameters. For over 10,000 instances of firm-level FDI data for Korea from 1996 to 2001, regression results are consistent with the hypothesis that disproportionably more FDI is made by more informed investors during a period of high macroeconomic uncertainty.

JEL Classification: D8; E2; F4

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Published Online: 2009-11-23
Published in Print: 2009-12-01

© 2009 Shawn Ni et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

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