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Uncertainty Shocks as Second-Moment News Shocks

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  • David Berger
  • Ian Dew-Becker
  • Stefano Giglio

Abstract

We provide evidence on the relationship between aggregate uncertainty and the macroeconomy. Identifying uncertainty shocks using methods from the news shocks literature, the analysis finds that innovations in realized stock market volatility are robustly followed by contractions, while shocks to forward-looking uncertainty have no significant effect on the economy. Moreover, investors have historically paid large premia to hedge shocks to realized but not implied volatility. A model in which fundamental shocks are skewed left can match those facts. Aggregate volatility matters, but it is the realization of volatility, rather than uncertainty about the future, that has been associated with declines.

Suggested Citation

  • David Berger & Ian Dew-Becker & Stefano Giglio, 2017. "Uncertainty Shocks as Second-Moment News Shocks," NBER Working Papers 23796, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23796
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    2. Tarek Alexander Hassan & Stephan Hollander & Laurence van Lent & Ahmed Tahoun, 2020. "The Global Impact of Brexit Uncertainty," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-332, Boston University - Department of Economics.
    3. Hassan, Tarek Alexander & Hollander, Stephan & Tahoun, Ahmed & van Lent, Laurence, 2019. "The Global Impact of Brexit Uncertainty," CEPR Discussion Papers 14253, C.E.P.R. Discussion Papers.
    4. Bachmann, Rüdiger & Born, Benjamin & Elstner, Steffen & Grimme, Christian, 2019. "Time-varying business volatility and the price setting of firms," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 82-99.
    5. Dennis Novy & Alan M. Taylor, 2020. "Trade and Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 102(4), pages 749-765, October.
    6. Kwangyong Park, 2019. "Uncertainty, Attention Allocation and Monetary Policy Asymmetry," Working Papers 2019-5, Economic Research Institute, Bank of Korea.
    7. Nicholas Bloom & Fatih Guvenen & Sergio Salgado, 2016. "Skewed Business Cycles," 2016 Meeting Papers 1621, Society for Economic Dynamics.
    8. Caggiano, Giovanni & Castelnuovo, Efrem, 2021. "Global Uncertainty," Research Discussion Papers 1/2021, Bank of Finland.
    9. Ragna Alstadheim & Christine Blandhol, 2018. "The global financial cycle, bank capital flows and monetary policy. Evidence from Norway," Working Paper 2018/2, Norges Bank.
    10. Boyan Jovanovic & Sai Ma, . "Uncertainty and Growth Disasters," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    11. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2019. "The Tail That Keeps the Riskless Rate Low," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 253-283.
    12. Michael Ryan, 2020. "An Anchor in Stormy Seas: Does Reforming Economic Institutions Reduce Uncertainty? Evidence from New Zealand," Working Papers in Economics 20/11, University of Waikato.
    13. Ahmed, Rashad, 2020. "Global Flight-to-Safety Shocks," MPRA Paper 103501, University Library of Munich, Germany.
    14. Cesa-Bianchi, Ambrogio & Pesaran, M Hashem & Rebucci, Alessandro, 2018. "Uncertainty and Economic Activity: A Multi-Country Perspective," CEPR Discussion Papers 12713, C.E.P.R. Discussion Papers.
    15. Dongho Song & Jenny Tang, 2018. "News-driven uncertainty fluctuations," Working Papers 18-3, Federal Reserve Bank of Boston.
    16. Danilo Cascaldi-Garcia, 2017. "Amplification effects of news shocks through uncertainty," 2017 Papers pca1251, Job Market Papers.
    17. Soroosh Soofi-Siavash & Emanuel Moench, 2021. "What Moves Treasury Yields?," Bank of Lithuania Working Paper Series 88, Bank of Lithuania.
    18. Redl, Chris, 2020. "Uncertainty matters: Evidence from close elections," Journal of International Economics, Elsevier, vol. 124(C).
    19. Bachmann, Rüdiger & Elstner, Steffen & Hristov, Atanas, 2017. "Surprise, surprise – Measuring firm-level investment innovations," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 107-148.
    20. Burkhard Raunig, 2021. "Economic Policy Uncertainty and Stock Market Volatility: A Causality Check," Working Papers 234, Oesterreichische Nationalbank (Austrian Central Bank).
    21. Lautenbacher, Stefan, 2020. "Subjective Uncertainty, Expectations, and Firm Behavior," MPRA Paper 103516, University Library of Munich, Germany.
    22. Michael Ryan, 2020. "A Narrative Approach to Creating Instruments with Unstructured and Voluminous Text: An Application to Policy Uncertainty," Working Papers in Economics 20/10, University of Waikato.

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    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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