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Micro-to-Macro Uncertainty

Author

Listed:
  • Girish Bahal
  • Damian Lenzo
  • Jia-Wei Loh

Abstract

Idiosyncratic volatility in the stock returns of large firms can drive aggregate volatility and real activity. Using daily stock price data for firms in 21 countries over 1999 to 2020, we isolate firm-specific volatility shocks and exploit the fat-tailed distribution of market capitalization to construct a granular instrument for country-level volatility (uncertainty). A one standard deviation increase in aggregate volatility reduces real GDP by 1%, raises unemployment by 1.2 percentage points, and lowers investment by 7% over three years. We validate 389 firm episodes using contemporaneous news coverage and show that narratively verified shocks generate even larger macroeconomic effects.

Suggested Citation

  • Girish Bahal & Damian Lenzo & Jia-Wei Loh, 2026. "Micro-to-Macro Uncertainty," CAMA Working Papers 2026-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2026-28
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    File URL: https://crawford.anu.edu.au/sites/default/files/2026-05/28_2026_Bahal_Lenzo_Loh.pdf
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    More about this item

    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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