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

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.