Black Swans and the Many Shades of Uncertainty

Various types of uncertainty shocks can explain many phenomena in macroeconomics and finance. But does this amount to throwing in a new, exogenous, unobserved shock to explain every challenging feature of business cycles? This paper explores the origin of micro uncertainty (uncertainty about firm-level shocks), macro uncertainty (uncertainty about aggregate shocks) and higher-order uncertainty shocks (disagreement) in a unified econometric framework. When agents use standard econometric techniques and real-time data to re-estimate parameters that govern the probability of black swans (unobserved extreme events), micro, macro and higher-order uncertainty covary just like their empirical counterparts. The results teach us that time-varying disaster risk and the many shades of uncertainty shocks are not distinct phenomena. All originate from using macro data to re-estimate the true probability distribution of economic outcomes.