Uncertainty shocks as second-moment news shocks

We provide evidence on the relationship between aggregate uncertainty and the macroeconomy. Identifying uncertainty shocks using methods from the news shocks literature, the analysis fi nds that innovations in realized stock market volatility are robustly followed by contractions, while shocks to forward-looking uncertainty have no signi ficant 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.

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