A Portfolio-Based Measure of Economic Uncertainty

54 Pages Posted: 10 Jan 2019

See all articles by Bao Huy Doan

Bao Huy Doan

University of New South Wales

F. Douglas Foster

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Li Yang

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Date Written: December 30, 2018

Abstract

Financial uncertainty and macroeconomic uncertainty are commonly proxied separately by the volatility of stock returns or key macroeconomic variables, respectively. We propose a portfolio-based measure (PBMEU) that aims to capture aggregate uncertainty in both financial markets and the macroeconomy. Our measure focuses on the volatility of a broad market portfolio including stocks, bonds, and commodities, where correlations between these individual markets have significant implications for the consequences of shocks to economy. When there are significant and persistent economy-wide shocks, the PBMEU produces higher level of uncertainty than the sum of financial and macroeconomic uncertainties, and in turn yields more significantly negative effects on macroeconomy. This asymmetric effect cannot be ascertained by the commonly used proxies such as VIX, aggregate uncertainty of Jurado et al. (2015) and economic policy uncertainty of Baker, et al. (2015)

Keywords: Economic Uncertainty, Broad Market Portfolio, Correlation Between Individual Markets, Market Specific and Economy-wide Shocks

JEL Classification: C58, D81, G12, G17

Suggested Citation

Doan, Bao Huy and Foster, F. Douglas and Yang, Li, A Portfolio-Based Measure of Economic Uncertainty (December 30, 2018). Available at SSRN: https://ssrn.com/abstract=3307999 or http://dx.doi.org/10.2139/ssrn.3307999

Bao Huy Doan

University of New South Wales ( email )

Sydney, NSW 2052
Australia

F. Douglas Foster

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Li Yang (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+610293855857 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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