Endogenous Second Moments: A Unified Approach to Fluctuations in Risk, Dispersion, and Uncertainty

Ludwig Straub and Robert Ulbricht

No 16-664, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Many important statistics in macroeconomics and finance—such as cross-sectional dispersions, risk, volatility, or uncertainty—are second moments. In this paper, we explore a mechanism by which second moments naturally and endogenously fluctuate over time as nonlinear transformations of fundamentals. Specifically, we provide general results that characterize second moments of transformed random variables when the underlying fundamentals are subject to distributional shifts that affect their means, but not their variances. We illustrate the usefulness of our results with a series of applications to (1) the cyclicality of the cross-sectional dispersions of macroeconomic variables, (2) the dispersion of MRPKs, (3) security pricing, and (4) endogenous uncertainty in Bayesian inference problems.

Keywords: Cross-sectional dispersion; endogenous uncertainty; monotone likelihood ratio property; nonlinear transformations; risk; second moments; volatility (search for similar items in EconPapers)
JEL-codes: C19 D83 E32 G13 (search for similar items in EconPapers)
Date: 2016-06, Revised 2018-03
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Endogenous second moments: A unified approach to fluctuations in risk, dispersion, and uncertainty (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:30521

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