Measuring Uncertainty in Stock Markets

Jorge M. Uribe, Helena Chuliá and Montserrat Guillen

We propose a daily index of time-varying financial uncertainty. The index is constructed after first removing the common variations in the series, emphasizing on the difference between risk (expected variation) and uncertainty (unexpected variation).

The complete paper can be found in:


DATA DESCRIPTION


We use 25 portfolios of stocks belonging to the NYSE, AMEX, and NASDAQ, sorted according to size and their book-to-market value, as provided by Kenneth French on his website

Methodology


The construction of our uncertainty index consists of two steps. First, we remove the common component of the series under study and calculate their idiosyncratic variation. To do this, we filter the original series using a generalized dynamic factor model (GDFM). Second, we calculate the stochastic volatility of each residual in the previous step using Markov chain Monte Carlo (MCMC) techniques. Then, we average the series, obtaining a single index of uncertainty for the stock market



Financial Uncertainty Index

Figure 1: US Uncertainty Index: Jan-06-27 to Sept-30-14. Grey areas correspond to NBER





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  • Universitat de Barcelona - Last Updated: 10-23-2016