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Uncertainty Shocks as Second-Moment News Shocks

Author

Listed:
  • Stefano Giglio

    (University of Chicago)

  • Ian Dew-Becker

    (Northwestern University)

  • David Berger

    (Northwestern University)

Abstract

This paper provides new empirical evidence on the relationship between aggregate uncertainty and the macroeconomy. We identify uncertainty shocks using methods from the literature on news shocks, following the observation that second-moment news is a shock to uncertainty. According to a wide range of VAR specifications, shocks to uncertainty have no significant effect on the economy, even though shocks to realized stock market volatility are contractionary. In other words, realized volatility, rather than uncertainty about the future, is associated with contractions. Furthermore, investors have historically paid large premia to hedge shocks to realized volatility, but the premia associated with shocks to uncertainty have not been statistically different from zero. We argue that these facts are consistent with the predictions of a simple model in which aggregate technology shocks are negatively skewed. So volatility matters, but it is the realization of volatility, rather than uncertainty about the future, that seems to be associated with declines.

Suggested Citation

  • Stefano Giglio & Ian Dew-Becker & David Berger, 2017. "Uncertainty Shocks as Second-Moment News Shocks," 2017 Meeting Papers 403, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:403
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    References listed on IDEAS

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    1. Bryan Kelly & Ľuboš Pástor & Pietro Veronesi, 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, American Finance Association, vol. 71(5), pages 2417-2480, October.
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    Cited by:

    1. repec:eee:moneco:v:101:y:2019:i:c:p:82-99 is not listed on IDEAS
    2. Kwangyong Park, 2019. "Uncertainty, Attention Allocation and Monetary Policy Asymmetry," Working Papers 2019-5, Economic Research Institute, Bank of Korea.
    3. Ragna Alstadheim & Christine Blandhol, 2018. "The global financial cycle, bank capital flows and monetary policy. Evidence from Norway," Working Paper 2018/2, Norges Bank.
    4. 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.
    5. repec:eee:dyncon:v:83:y:2017:i:c:p:107-148 is not listed on IDEAS
    6. Danilo Cascaldi-Garcia, 2017. "Amplification effects of news shocks through uncertainty," 2017 Papers pca1251, Job Market Papers.
    7. 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.
    8. 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.

    More about this item

    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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