The Term Structure of Uncertainty: New Evidence from Survey Expectations

49 Pages Posted: 6 Aug 2019 Last revised: 7 May 2020

See all articles by Carola Binder

Carola Binder

Haverford College - Department of Economics

Tucker McElroy

U.S. Census Bureau - Center for Statistical Research and Methodology

Xuguang Simon Sheng

American University

Date Written: August 1, 2019

Abstract

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. We find that the uncertainty curve is 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 document substantial heterogeneity across forecasters in both the level and the term structure of uncertainty, and show that the difference between long-run and short-run uncertainty is procyclical. We develop a signal extraction model that features (i) Kalman filter updating, (ii) time-varying uncertainty and (iii) multi-step ahead forecasting. Our model implies that the heterogeneous patterns of uncertainty over different time horizons depend on forecaster's perceived persistence and volatility of the signal and the noise.

Keywords: Density Forecasts, Perceived Persistence, Term Structure, Subjective Uncertainty

JEL Classification: D83, D84, E31, E32, E37

Suggested Citation

Binder, Carola and McElroy, Tucker and Sheng, Xuguang Simon, The Term Structure of Uncertainty: New Evidence from Survey Expectations (August 1, 2019). Available at SSRN: https://ssrn.com/abstract=3430783 or http://dx.doi.org/10.2139/ssrn.3430783

Carola Binder (Contact Author)

Haverford College - Department of Economics ( email )

Haverford, PA 19041
United States

Tucker McElroy

U.S. Census Bureau - Center for Statistical Research and Methodology ( email )

4600 Silver Hill Road
Washington, DC 20233-9100
United States

Xuguang Simon Sheng

American University ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States

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