טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentEli Kovski
SubjectNature of Investment-Uncertainty Relationship: Evidence from
Israel
DepartmentDepartment of Industrial Engineering and Management
Supervisor Full Professor Bar Ilan Avner


Abstract

This paper investigates investment policy of Israeli firms using firm-level panel data. Major purpose of this research is to examine the nature of investment-uncertainty relationship, relying on uncertainty proxy built on firm-level panel. Uncertainty proxy is derived from stock market conditional variance applying asymmetric GARCH models. The panel consists of 65 companies of several industries included in market index TA-100. The period of the observation varies due to accessibility of financial reports: most of firms are examined from last quarter of 1992 till second quarter of 2003. Implementing asymmetric approach allows us to neutralize the disturbances caused by so-called “asymmetric volatility” phenomena which assume different reaction of volatility to market’s ups and downs. The analysis of the data is performed on two levels: general and firm-level. The general approach implements cross-section time series analysis for a standard accelerator investment model with controlling for uncertainty proxy. The coefficient for uncertainty proxy appears to be negative with high significance. Extending the research by estimating the investment on firm-level panel by VAR model, suggests ambiguous investment-uncertainty relationship. Further analysis of the data by binary models (extreme value or Gompertz function) verifies highly significant negative effect of uncertainty on investment. The nature of this effect is non-linear and demonstrates different uncertainty thresholds due to the firms’ financial characteristics. Firms with more financial stability appear to be less risky in their investment policy and have lower uncertainty thresholds than firms with unstable or developing financial structure.