Uncertainty trends

65 Pages Posted: 14 Oct 2018 Last revised: 2 Sep 2021

See all articles by Federico M. Bandi

Federico M. Bandi

Johns Hopkins University - Carey Business School

Lorenzo Bretscher

Swiss Finance Institute - HEC Lausanne; Centre for Economic Policy Research (CEPR)

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: November 17, 2018

Abstract

The volatility of total factor productivity (TFP) is shown to have similar long-run predictive ability for market returns to the dividend price ratio. When seen through an asset pricing lens, this finding implies that TFP volatility should also predict real cash flows and/or real interest rates: it is found to mainly predict real cash flows through inflation rates. A model with endogenous growth, Epstein-Zin preferences and price rigidities reconciles both uncertainty-driven long-run predictability and its real implications. Within the model we justify why alternative no- tions of uncertainty have similar predictive ability as TFP volatility provided their low-frequency signal is extracted.

Keywords: uncertainty trends, valuation ratios, endogenous growth, price rigidities, financial uncertainty

JEL Classification: C22, E32, E44, G12, G17

Suggested Citation

Bandi, Federico Maria and Bretscher, Lorenzo and Tamoni, Andrea, Uncertainty trends (November 17, 2018). Available at SSRN: https://ssrn.com/abstract=3253811 or http://dx.doi.org/10.2139/ssrn.3253811

Federico Maria Bandi

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Lorenzo Bretscher

Swiss Finance Institute - HEC Lausanne ( email )

Chavannes-près-Renens, Vaud
Switzerland
1015 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andrea Tamoni (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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