Black Swans and the Many Shades of Uncertainty

Laura Veldkamp, Anna Orlik and Nicholas Kozeniauskas
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Anna Orlik: Federal Reserve Board of Governors
Nicholas Kozeniauskas: New York University

No 677, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Various types of uncertainty shocks can explain many phenomena in macroeconomics and finance. But does this amount to throwing in a new, exogenous, unobserved shock to explain every challenging feature of business cycles? This paper explores the origin of micro uncertainty (uncertainty about firm-level shocks), macro uncertainty (uncertainty about aggregate shocks) and higher-order uncertainty shocks (disagreement) in a unified econometric framework. When agents use standard econometric techniques and real-time data to re-estimate parameters that govern the probability of black swans (unobserved extreme events), micro, macro and higher-order uncertainty covary just like their empirical counterparts. The results teach us that time-varying disaster risk and the many shades of uncertainty shocks are not distinct phenomena. All originate from using macro data to re-estimate the true probability distribution of economic outcomes.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:677

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