Measuaring Uncertainty in the Stock Market

Helena Chuliá, Montserrat Guillén () and Jorge Uribe
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Montserrat Guillén: Faculty of Economics, University of Barcelona

No 201524, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

Abstract: We propose a daily index of time-varying stock market uncertainty. The index is constructed after first removing the common variations in the series, based on recent advances in the literature that emphasize the difference between risk (expected variation) and uncertainty (unexpected variation). To this end, we draw on data from 25 portfolios between 1926 and 2014, sorted by size and book-to-market value. This strategy considerably reduces information requirements and modeling design costs, compared to previous proposals. We compare our index with indicators of macrouncertainty and estimate the impact of an uncertainty shock on the dynamics of variables such as production, employment, consumption, stock market prices and interest rates. Our results show that, even when the estimates can be considered as a measure of stock market uncertainty (i.e., financial uncertainty), they perform very well as indicators of the uncertainty of the economy as a whole.

Keywords: Uncertainty, Risk, Factor models, Stock market. JEL classification: E00; E44; G10; G14 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015-11, Revised 2015-11
New Economics Papers: this item is included in nep-mac, nep-ore and nep-rmg
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Measuring uncertainty in the stock market (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ira:wpaper:201524

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