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A geometric approach to proxy economic uncertainty by a metric of disagreement in qualitative expectations

Oscar Claveria (), Enric Monte and Salvador Torra
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Enric Monte: Polytechnic University of Catalunya (UPC)
Salvador Torra: Riskcenter-IREA, University of Barcelona

No 201803, AQR Working Papers from University of Barcelona, Regional Quantitative Analysis Group

Abstract: In this study we present a geometric approach to proxy economic uncertainty. We design a positional indicator of disagreement among survey-based agents' expectations about the state of the economy. Previous dispersion-based uncertainty indicators derived from business and consumer surveys exclusively make use of the two extreme pieces of information coming from the respondents expecting a variable to rise and to fall. With the aim of also incorporating the information coming from the share of respondents expecting a variable to remain constant, we propose a geometrical framework and use a barycentric coordinate system to generate a measure of disagreement, referred to as a discrepancy indicator. We assess its performance, both empirically and experimentally, by comparing it to the standard deviation of the share of positive and negative responses, which has been used by Bachman et al. (2013) as a proxy for economic uncertainty. When applied in sixteen European countries, we find that both time-varying metrics co-evolve in most countries for expectations about the country's overall economic situation in the present, but not in the future. Additionally, we obtain their simulated sampling distributions and we find that the proposed indicator gravitates uniformly towards the three vertices of the simplex representing the three answering categories, as opposed to the standard deviation, which tends to overestimate the level of uncertainty as a result of ignoring the no-change responses. Consequently, we find evidence that the information coming from agents expecting a variable to remain constant has an effect on the measurement of disagreement.

Keywords: Economic uncertainty; disagreement; expectations; economic tendency surveys; geometry; barycentric coordinate system; spatial vectors JEL classification: C51; C55; C63; C83; C93 (search for similar items in EconPapers)
Date: 2018-04, Revised 2018-04
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