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Cross-sectional uncertainty and the business cycle: evidence from 40 years of options data

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  • Giglio, Stefano
  • Dew-Becker, Ian

Abstract

This paper presents a novel and unique measure of cross-sectional uncertainty constructed from stock options on individual firms. Cross-sectional uncertainty varied little between 1980 and 1995, and subsequently had three distinct peaks – during the tech boom, the financial crisis, and the coronavirus epidemic. Cross-sectional un- certainty has had a mixed relationship with overall economic activity, and aggregate uncertainty is much more powerful for forecasting aggregate growth. The data and moments can be used to calibrate and test structural models of the effects of uncertainty shocks. In international data, we find similar dynamics and a strong common factor in cross-sectional uncertainty.

Suggested Citation

  • Giglio, Stefano & Dew-Becker, Ian, 2021. "Cross-sectional uncertainty and the business cycle: evidence from 40 years of options data," CEPR Discussion Papers 16306, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16306
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    Cited by:

    1. Altig, Dave & Baker, Scott & Barrero, Jose Maria & Bloom, Nicholas & Bunn, Philip & Chen, Scarlet & Davis, Steven J. & Leather, Julia & Meyer, Brent & Mihaylov, Emil & Mizen, Paul & Parker, Nicholas &, 2020. "Economic uncertainty before and during the COVID-19 pandemic," Journal of Public Economics, Elsevier, vol. 191(C).
    2. Herskovic, Bernard & Kind, Thilo & Kung, Howard, 2023. "Micro uncertainty and asset prices," Journal of Financial Economics, Elsevier, vol. 149(1), pages 27-51.
    3. Lu, Fei & Ma, Feng, 2023. "Cross-sectional uncertainty and stock market volatility: New evidence," Finance Research Letters, Elsevier, vol. 57(C).
    4. Jozef Barunik & Mattia Bevilacqua & Michael Ellington, 2023. "Common Firm-level Investor Fears: Evidence from Equity Options," Papers 2309.03968, arXiv.org.
    5. Karau, Sören, 2021. "Monetary policy and Bitcoin," Discussion Papers 41/2021, Deutsche Bundesbank.
    6. Gondhi, Naveen, 2023. "Rational inattention, misallocation, and the aggregate economy," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 50-75.
    7. Yu, Deshui & Huang, Difang, 2023. "Cross-sectional uncertainty and expected stock returns," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 321-340.
    8. Neuhierl, Andreas & Tang, Xiaoxiao & Varneskov, Rasmus Tangsgaard & Zhou, Guofu, 2022. "Option characteristics as cross-sectional predictors," LawFin Working Paper Series 37, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    9. Zhen Yu & Yuankun Li & Jing Zhao, 2023. "Epidemic outbreak and foreign direct investment fluctuation," The World Economy, Wiley Blackwell, vol. 46(4), pages 1051-1081, April.

    More about this item

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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