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Persistence of Economic Uncertainty: A Comprehensive Analysis

Vasilios Plakandaras (), Rangan Gupta () and Mark Wohar ()

No 201810, Working Papers from University of Pretoria, Department of Economics

Abstract: One of the most heavily researched and cited issues in applied economics is the relationship of uncertainty indices with the financial and macroeconomic variables. While the statistical features of financial and macroeconomic variables have been thoroughly examined, virtually nothing has been done to examine uncertainty indices under the statistical perspective. In this paper, we focus on two primary characteristics of uncertainty indices: persistence and chaotic behavior. In order to evaluate the persistence and the chaotic behavior we analyze 72 popular uncertainty indices constructed by forecasting models, text mining from news articles and data mining from monetary variables to measure the Hurst and Lyapunov exponents in rolling windows. The examination in rolling windows provides a dynamic evaluation of the specific characteristics revealing significant variations of persistence and chaotic dynamics with time. More specifically, we find that almost all uncertainty indices are persistent, while the chaotic dynamics are detected only sporadically and for certain indices during recessions of economic turbulence. Thus, we suggest that the examination of persistence and chaos should be a prerequisite step before using uncertainty indices in economic policy models.

Keywords: Economic policy uncertainty; persistence; chaos; Hurst exponent; Lyapunov exponent (search for similar items in EconPapers)
JEL-codes: C46 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-02
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