Expectations, Economic Uncertainty, and Sentiment

Abstract

Objective: this article aims to help unravel if and how economic uncertainty interacts with the informational structure of sentiment. Methods: the empirical strategy is based on a non-linear and non-parametric causality test to investigate the interaction between variables as distributions. This article builds primarily on the literature on expectation formation. Results: it was found that uncertainty based on the media (ex-ante) precedes sentiment, at most, until the second moment of its distribution. In addition, sentiment helps predict the informational structure of fundamental uncertainty (ex-post) and higher order moments of ex-ante uncertainty. Conclusion: sentiment can be considered a channel for uncertainty through the tone of expectations and erroneous expectations. Ex-ante uncertainty measures can also help calibrate the rational cost-benefit calculation of attention by acting as a leading indicator of the increasing value of information.