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Expectations Concordance and Stock Market Volatility: Knightian Uncertainty in the Year of the Pandemic

Author

Listed:
  • Roman Frydman

    (New York University)

  • Nicholas Mangee

    (Georgia Southern University)

Abstract

This study introduces a novel index based on expectations concordance for explaining stock-price volatility when historically unique events cause unforeseeable change and Knightian uncertainty in the process driving outcomes. Expectations concordance measures the degree to which non-repetitive events are associated with directionally similar expectations of future returns. Narrative analytics of daily news reports allow for assessment of bullish versus bearish views in the stock market. Increases in expectations concordance across all KU events leads to reinforcing effects and an increase in stock market volatility. Lower expectations concordance produces a stabilizing effect wherein the offsetting views reduce market volatility. The empirical findings hold for ex post and ex ante measures of volatility and for OLS and GARCH estimates.

Suggested Citation

  • Roman Frydman & Nicholas Mangee, 2021. "Expectations Concordance and Stock Market Volatility: Knightian Uncertainty in the Year of the Pandemic," Working Papers Series inetwp164, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp164
    DOI: 10.36687/inetwp164
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    File URL: https://doi.org/10.36687/inetwp164
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    References listed on IDEAS

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    Cited by:

    1. Mangee, Nicholas, 2024. "Stock price swings and fundamentals: The role of Knightian uncertainty," International Review of Financial Analysis, Elsevier, vol. 91(C).

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    More about this item

    Keywords

    expectations concordance; narrative analytics; volatility; Knightian uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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