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Keywords:Uncertainty 

Report
Estimating a structural model of herd behavior in financial markets

We develop a new methodology for estimating the importance of herd behavior in financial markets. Specifically, we build a structural model of informational herding that can be estimated with financial transaction data. In the model, rational herding arises because of information-event uncertainty. We estimate the model using 1995 stock market data for Ashland Inc., a company listed on the New York Stock Exchange. Herding occurs often and is particularly pervasive on certain days. In an information-event day, on average, 2 percent (4 percent) of informed traders herd-buy (sell). In 7 percent ...
Staff Reports , Paper 561

Working Paper
Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities

This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment suggests that the procedure works well in practice. Implementing the procedure with actual S&P 500 option-implied volatilities and high-frequency five-minute-based realized volatilities results in significant temporal dependencies in the estimated stochastic volatility risk premium, ...
Finance and Economics Discussion Series , Paper 2004-56

Working Paper
Assessing International Commonality in Macroeconomic Uncertainty and Its Effects

This paper uses a large vector autoregression to measure international macroeconomic uncertainty and its effects on major economies. We provide evidence of significant commonality in macroeconomic volatility, with one common factor driving strong comovement across economies and variables. We measure uncertainty and its effects with a large model in which the error volatilities feature a factor structure containing time-varying global components and idiosyncratic components. Global uncertainty contemporaneously affects both the levels and volatilities of the included variables. Our new ...
Working Papers , Paper 201803R

Working Paper
Investment, idiosyncratic risk, and ownership

High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment decisions from the perspective of well-diversified shareholders. We empirically document that when idiosyncratic risk rises, firm investment falls, and more so when managers own a larger fraction of the firm. This negative effect of managerial risk aversion on investment is mitigated if executives are compensated with options rather than with shares or if ...
Finance and Economics Discussion Series , Paper 2011-54

Discussion Paper
Trade Policy Uncertainty May Affect the Organization of Firms’ Supply Chains

Global trade policy uncertainty has increased significantly, largely because of a changing tariff regime between the United States and China. In this blog post, we argue that trade policy can have a significant effect on firms? organization of supply chains. When the probability of a trade war rises, firms become less likely to form long-term, just-in-time relationships with foreign suppliers, which may lead to higher costs and welfare losses for consumers. Our research shows that even in the absence of actual tariff changes, an increased likelihood of a trade war can significantly distort ...
Liberty Street Economics , Paper 20191106

Working Paper
Polarized business cycles

We are motivated by four stylized facts computed for emerging and developed economies: (i) business cycle movements are wider in emerging countries; (ii) economies in emerging countries experience greater economic policy uncertainty; (iii) emerging economies are more polarized and less politically stable; and (iv) economic policy uncertainty is positively related to political polarization. We show that a standard real business cycle (RBC) model augmented to incorporate political polarization, a `polarized business cycle' (PBC) model, is consistent with these facts. Our main hypothesis is that ...
Working Papers , Paper 13-44

Journal Article
Measuring economic uncertainty using the Survey of Professional Forecasters

Uncertainty about how the economy will evolve is a key concern for households and firms. People?s views on how likely it is that the economy will be growing, stagnating, or in recession help shape the actions they take today. Consequently, how households and firms respond to uncertainty has implications for economic activity. In addition, uncertainty matters to policymakers: Monetary policymakers recognize that if uncertainty about future inflation is high, decision-making by households and firms becomes more complicated. In this article, Keith Sill describes how uncertainty can be measured ...
Business Review , Issue Q4 , Pages 16-27

Journal Article
Why small businesses were hit harder by the recent recession

Although both large and small businesses felt the sting of job losses during the 2007-09 downturn, small firms experienced disproportionate declines. A study of the recession?s employment effect on small firms suggests that poor sales and economic uncertainty were the main reasons for their weak performance and sluggish recovery?problems that affected large firms too, but to a lesser degree. Although a tightened credit supply constrained some small firms, weak consumer demand for the firms? products and services was a more pressing factor, reducing revenues and dampening new investment ...
Current Issues in Economics and Finance , Volume 17 , Issue July

Working Paper
Uncertainty shocks are aggregate demand shocks

We study the macroeconomic effects of uncertainty shocks in a DSGE model with labor search frictions and sticky prices. In contrast to a real business cycle model, the model with search frictions implies that uncertainty shocks reduce potential output, because a job match represents a long-term employment relation and heightened uncertainty reduces the value of a match. In the sticky-price equilibrium, an uncertainty shock--regardless of its source--consistently acts like an aggregate demand shock because it raises unemployment and lowers inflation. We present empirical evidence--based on a ...
Working Paper Series , Paper 2012-10

Working Paper
The political polarization index

American politics have become increasingly polarized in recent decades. To the extent that political polarization introduces uncertainty about economic policy, this pattern may have adversely affected the economy. According to existing theories, a rise in the volatility of fiscal shocks faced by individuals should result in a decline in economic activity. Moreover, if polarization is high around election dates, businesses and households may be induced to delay decisions that involve high reversibility costs (such as investment or hiring under search costs). Testing these theories has been ...
Working Papers , Paper 13-41

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