On Measuring Uncertainty: Snakes and Ladders (original) (raw)

Risk and Uncertainty: Macroeconomic Perspective

2014

The paper discusses main concepts and definitions related to macroeconomic uncertainty as operational concept. It proposes classifications of uncertainty according to areas of application and measurements. Properties of different methodologies of assessing uncertainty used in empirical analysis are discussed. The paper also analyses positive and negative aspects of particular methods and illustrates one of the most relevant problems, which is the biasness of the experts’ based assessments, by the analysis of the National Bank of Poland Survey of Professional Forecasters. A simple uncertainty indicator based on forecast errors for the analysis of inflation uncertainty in Poland is computed and evaluated.

What is Certain about Uncertainty?

International Finance Discussion Paper, 2020

Researchers, policymakers, and market participants have become increasingly focused on the effects of uncertainty and risk on financial market and economic outcomes. This paper provides a comprehensive survey of the many existing measures of risk, uncertainty, and volatility. It summarizes what these measures capture, how they are constructed, and their effects, paying particular attention to large uncertainty spikes, such as those appearing concurrently with the outbreak of COVID-19. The measures are divided into three types: (1) news-based, survey- based, and econometric; (2) asset market based; and (3) Knightian uncertainty. While uncertainty has significant real and financial effects and spills over across countries, the size and persistence of these effects depend crucially on the source of uncertainty.

A Short Review of the Recent Literature on Uncertainty

Australian Economic Review, 2017

This article summarises the academic contributions presented and discussed during the 2016 edition of the Melbourne Institute Macroeconomic Policy Meetings, which focused on the role played by uncertainty for a number of countries’ business cycle. Considerations on the interaction between uncertainty and financial frictions, the global dimension of uncertainty, uncertainty shocks in times of unconventional monetary policy and the imperfect knowledge that agents have over policy targets are among the discussions entertained in this article. The main insights coming from those papers are connected with the extant literature and directions for future research are offered.

Measuring Risk and Uncertainty in Financial Markets

2016

Author(s): Khanom, Najrin | Advisor(s): Chauvet, Marcelle; Ullah, Aman | Abstract: The theme of this dissertation is the risk and return modeling of financial time series. The dissertation is broadly divided into three chapters; the first chapter focuses on measuring risks and uncertainty in the U.S. stock market; the second on measuring risks of individual financial assets; and the last chapter on predicting stock return. The first chapter studies the movement of the SaP 500 index driven by uncertainty and fear that cannot be explained by economic fundamentals. A new measure of uncertainty is introduced, using the tone of news media coverage on the equity market and the economy; aggregate holding of safe financial assets; and volatility in SaP 500 options trading. Major contributions of this chapter include uncovering a significant non-linear relationship between uncertainty and changes in the business cycle. An increase in uncertainty is found to be associated with drastic but sho...

The role of fundamental uncertainty in economics and decision-making

Economy & finance

The subject of this paper is the direct influence of uncertainty on economic decisions. The first part is a historical overview of the use of probability as a decisionmaking tool. The second part explores points of connection between Keynesian economics and uncertainty. After the discussion of epistemological and ontological uncertainty, the substance of fundamental uncertainty is elaborated. A separate section is dedicated to the role of ‘animal spirits’, conventions and ‘black swan’ phenomena. The closing section focusses on atomic and organic interrelationships in the economic material, the relation between complexity and uncertainty, and with the triangle probability-uncertainty-econometrics. The aim of the paper is to substantiate that uncertainty – whether it is termed ‘fundamental’, ‘radical’, ‘irreducible’ or else – is unavoidably and inevitably part of economic reasoning and decision-making.

Investments and uncertainty revisited: the case of the US economy

Applied Economics, 2017

This paper examines the relationship between investments and uncertainty for the US economy, as the latter is approximated by consumer sentiment, purchasing managers' prospects and economic policy uncertainty. Contrary to the existing literature, we provide evidence that this relationship is time-varying. The time variation is attributed to the observed temporal replacement effect between private and public investments. Furthermore, we show that there are two distinct correlation regimes in this relationship and unless we concentrate on the two regimes, we cannot fully unravel the real link between uncertainty and investments. Finally, we examine whether the use of two correlation regimes provides better forecasts of investments compared to the use of the uncertainty indices alone. The forecasting exercise reveals that the use of correlation regimes provides statistically superior out-of-sample forecasts.

Essays on Risk and Uncertainty in Economics and Finance

2018

This thesis adds to the resolution of two problems in finance and economics: i) what is macro-financial uncertainty? : How to measure it? How is it different from risk? How important is it for the financial markets? And ii) what sort of asymmetries underlie financial risk and uncertainty propagation across the global financial markets? That is, how risk and uncertainty change according to factors such as market states or market participants. In Chapter 2, which is entitled “Momentum Uncertainties”, I study the relationship between macroeconomic uncertainty and the abnormal returns of a momentum trading strategy in the stock market. I show that high levels of uncertainty in the economy impact negatively and significantly the returns of a portfolio of stocks that consist of buying past winners and selling past losers. High uncertainty reduces below zero the abnormal returns of momentum, extinguishes the Sharpe ratio of the momentum strategy, while increases the probability of momentum...

The Term Structure of Uncertainty: New Evidence from Survey Expectations

SSRN Electronic Journal

We construct measures of individual forecasters' subjective uncertainty at horizons ranging from one to five years, incorporating a rich information set from the European Central Bank's Survey of Professional Forecasters. Our measures have two key advantages over traditional measures: (i) they reflect the subjective perceptions of market participants; (ii) they are ex ante measures that do not require the knowledge of realized outcomes. We find that the uncertainty curve is much more linear than the disagreement curve-uncertainty at the one-year and two-year horizons can almost perfectly predict uncertainty at the five-year horizon, but not so for disagreement. We develop a learning model that captures the two channels through which large shocks affect the term structure of uncertainty: wake-up effect-the visibly large shocks induce immediate and synchronized updating of information for economic agents, and waitand-see effect-the occurrence of those shocks generates increased uncertainty among agents. Depending on the magnitude of the shock, and whether it is temporary or permanent, the response of uncertainty afterwards displays heterogeneous patterns over different time horizons.

Policy Briefs Series Uncertainty: Macroeconomic Effects and Policy Implications

2017

Uncertainty is a concept which refers to the inability of consumers, managers and policymakers to perfectly predict future events like a change in labor income, the growth rate of technology, or a variation in the economic environment. Given that consumers and entrepreneurs typically have to make decisions about consumption, labor supply, productive investment and so on in the presence of uncertainty, it is of interest to understand how uncertainty can affect such decisions. This policy brief reviews the most recent literature on this subject by addressing the following questions: Is there a relationship between uncertainty, agents’ decisions, and the business cycle? Is the source of uncertainty domestic or global? How should macroeconomic policies be designed to tackle the negative effects of uncertainty? The findings of this policy brief are: (i) uncertainty is countercyclical (as it tends to peak during recessions) and it appears to be a driver of the business cycle (namely, cons...

Uncertainty in macroeconomic policy-making: art or science?

Philosophical transactions. Series A, Mathematical, physical, and engineering sciences, 2011

Uncertainty is pervasive in economic policy-making. Modern economies share similarities with other complex systems in their unpredictability. But economic systems also differ from those in the natural sciences because outcomes are affected by the state of beliefs of the systems' participants. The dynamics of beliefs and how they interact with economic outcomes can be rich and unpredictable. This paper relates these ideas to the recent crisis, which has reminded us that we need a financial system that is resilient in the face of the unpredictable and extreme. It also highlights how such uncertainty puts a premium on sound communication strategies by policy-makers. This creates challenges in informing others about the uncertainties in the economy, and how policy is set in the face of those uncertainties. We show how the Bank of England tries to deal with some of these challenges in its communications about monetary policy.