Good and Bad Uncertainty: Macroeconomic and Financial Market Implications

69 Pages Posted: 1 Dec 2015

See all articles by Gill Segal

Gill Segal

University of North Carolina (UNC) at Chapel Hill - Finance Area

Ivan Shaliastovich

University of Wisconsin - Madison

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Date Written: 2015

Abstract

Does macroeconomic uncertainty increase or decrease aggregate growth and asset prices? To address this question, we decompose aggregate uncertainty into ‘good’ and ‘bad’ volatility components, associated with positive and negative innovations to macroeconomic growth. We document that in line with our theoretical framework, these two uncertainties have opposite impact on aggregate growth and asset prices. Good uncertainty predicts an increase in future economic activity, such as consumption, output, and investment, and is positively related to valuation ratios, while bad uncertainty forecasts a decline in economic growth and depresses asset prices. Further, the market price of risk and equity beta of good uncertainty are positive, while negative for bad uncertainty. Hence, both uncertainty risks contribute positively to risk premia, and help explain the cross-section of expected returns beyond cash flow risk.

Suggested Citation

Segal, Gill and Shaliastovich, Ivan and Yaron, Amir, Good and Bad Uncertainty: Macroeconomic and Financial Market Implications (2015). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Journal of Financial Economics (JFE), Vol. 117, No. 2, 2015, Kenan Institute of Private Enterprise Research Paper No. 20-08, Available at SSRN: https://ssrn.com/abstract=3675787 or http://dx.doi.org/10.2139/ssrn.3675787

Gill Segal (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Ivan Shaliastovich

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Amir Yaron

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1241 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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