Lags, Convexity and the Investment-Uncertainty Relationship

17 Pages Posted: 17 Feb 2006

See all articles by Yishay Maoz

Yishay Maoz

The Open University of Israel - Department of Management and Economics

Date Written: March 2005

Abstract

The effect that investment lags has on the uncertainty-investment relationship is studied by modifying the Bar-Ilan and Strange (1996) model in a manner that enables analytical solution. It turns out that: (i) If the time lag is sufficiently small, uncertainty affects investment negatively; (ii) A sufficiently large time lag engenders an inverse u-shape relationship between the degree of uncertainty and the profit level that triggers investment; (iii) When such an inverse u-shape exists, the higher is the length of the time lag (or the degree of profit convexity) the wider is the range of a positive uncertainty-investment relationship.

JEL Classification: D81

Suggested Citation

Maoz, Yishay, Lags, Convexity and the Investment-Uncertainty Relationship (March 2005). Available at SSRN: https://ssrn.com/abstract=883304 or http://dx.doi.org/10.2139/ssrn.883304

Yishay Maoz (Contact Author)

The Open University of Israel - Department of Management and Economics ( email )

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