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What Are Uncertainty Shocks?

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  • Veldkamp, Laura
  • Kozeniauskas, Nicholas
  • Orlik, Anna

Abstract

One of the primary innovations in modern business cycle research is the idea that uncertainty shocks drive aggregate fluctuations. But changes in stock prices (VIX), disagreement among macro forecasters, and the cross-sectional dispersion in firms' earnings, while all used to measure uncertainty, are not the same, either conceptually or statistically. Are these really measuring the same phenomenon and not just a collection of counter-cyclical second moments? If so, what is this shock that has such diverse impacts on the economy? Statistically, there is some rationale for naming all uncertainty shocks. There exists a subset of commonly-used uncertainty measures that comove significantly, above and beyond what the cycle alone could explain. Therefore, we explore a mechanism that generates micro dispersion (cross-sectional variance of firm-level outcomes), higher-order uncertainty (disagreement) and macro uncertainty (uncertainty about macro outcomes) from a change in macro volatility. The mechanism succeeds quantitatively, causing uncertainty measures to covary, just as they do in the data. If we want to continue the practice of naming these changes all \uncertainty shocks," these results provide guidance about what such a shock might actually entail.

Suggested Citation

  • Veldkamp, Laura & Kozeniauskas, Nicholas & Orlik, Anna, 2016. "What Are Uncertainty Shocks?," CEPR Discussion Papers 11501, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11501
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    References listed on IDEAS

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    Cited by:

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    2. Boragan Aruoba & Dun Jia & Felipe Saffie, 2018. "Measuring Uncertainty," 2018 Meeting Papers 490, Society for Economic Dynamics.
    3. Carlos Garriga & Aaron Hedlund, 2020. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession," American Economic Review, American Economic Association, vol. 110(6), pages 1603-1634, June.
    4. Burdekin, Richard C.K. & Siklos, Pierre L., 2022. "Armageddon and the stock market: US, Canadian and Mexican market responses to the 1962 Cuban Missile Crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 112-127.
    5. Straub, Ludwig & Ulbricht, Robert, 2019. "Endogenous second moments: A unified approach to fluctuations in risk, dispersion, and uncertainty," Journal of Economic Theory, Elsevier, vol. 183(C), pages 625-660.
    6. Marco DiMaggio & Amir Kermani & Rodney Ramcharan & Edison Yu, 2017. "Household Credit and Local Economic Uncertainty," Working Papers 17-21, Federal Reserve Bank of Philadelphia.

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    Keywords

    Uncertainty; Disaster risk; Disagreement; Asymmetric information; Business cycles;
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