A Consumption-Based Identification of Global Economic Uncertainty
41 Pages Posted: 9 Oct 2020
Date Written: August 20, 2020
This paper identifies a global uncertainty factor by estimating an international asset pricing model featuring macroeconomic uncertainty with long-run risk factors. The global factor captures the time-varying fluctuations of common stochastic volatilities of consumption and dividend growths for countries, and reflects uncertainty in that it generates the highest volatility of volatility in transition period. The model quantitatively explains key asset pricing moments, and the estimated factor sharply increases during major international adverse events. Shocks to our global economic uncertainty factor significantly account for the likelihood of key economic and financial events, and outperforms existing measures of economic and financial uncertainties.
Keywords: GlobalGlobal Macroeconomic Uncertainty, Long-Run Uncertainty, Stochastic Volatility, Volatility of Volatility, Bayesian Method, Generalized Method of Moment
JEL Classification: C11, G12, E32, F41
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