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A Volatility Smile-Based Uncertainty Index

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  • José Valentim Machado Vicente
  • Jaqueline Terra Moura Marins

Abstract

We propose a new uncertainty index based on the discrepancy of the smile of FX options. We show that our index spikes near turbulent periods, forecasts economic activity and its innovations hold a significant and negative equity premium. Unlike other uncertainty indexes, our index is supported by equilibrium models, which relate the difference of options prices across moneyness to uncertainty. Moreover, our index is based on investment decisions, can be easily and continuously updated and is comparable across countries.

Suggested Citation

  • José Valentim Machado Vicente & Jaqueline Terra Moura Marins, 2019. "A Volatility Smile-Based Uncertainty Index," Working Papers Series 502, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:502
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    References listed on IDEAS

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