Uncertainty Shocks as Second-Moment News Shocks

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.

The Global Impact of Brexit Uncertainty

“…It is well-recognized in both theoretical and empirical work that uncertainty can directly influence firm-level investments and employment (Pindyck, 1988;Bernanke, 1983;Dixit and Pindyck, 1994;Bloom et al, 2007). Furthermore, recent developments in the literature have highlighted that first and second moment shocks can appear together, either amplifying or confounding each other (Bloom et al, 2018;Berger et al, 2017;Hassan et al, 2019). We examine these predictions in the context of Brexit, which (it has been argued) represents an "almost ideal" uncertainty shock inasmuch as it was large, unanticipated, and delayed in implementation (Fisman and Zitzewitz, 2019;Born et al, 2019).…”

The Global Impact of Brexit Uncertainty

“…It is well-recognized in both theoretical and empirical work that uncertainty can directly influence firm-level investments and employment (Pindyck, 1988;Bernanke, 1983;Dixit and Pindyck, 1994;Bloom et al, 2007). Furthermore, recent developments in the literature have highlighted that first and second moment shocks can appear together, either amplifying or confounding each other (Bloom et al, 2018;Berger et al, 2017;Hassan et al, 2019). We examine these predictions in the context of Brexit, which (it has been argued) represents an "almost ideal" uncertainty shock inasmuch as it was large, unanticipated, and delayed in implementation (Fisman and Zitzewitz, 2019;Born et al, 2019).…”

VIX derivatives, hedging and vol-of-vol risk

“…The VIX index is considered a barometer of investor sentiment and market-wide volatility. 1 It has also been shown that the index is informative about future economic activity and that shocks to the VIX index affect real economic activity (see Berger, Dew-Becker, & Giglio, 2019;Bloom, 2009 ). Since the VIX index is not a directly tradeable instrument, the Chicago Board Options Exchange (CBOE) introduced VIX derivatives to allow investors to create tradeable exposure to volatility.…”