Research on Uncertainty and its Application in Financial Markets

Abstract

This paper explores the theoretical frameworks and practical implications of uncertainty in economics and decision-making. And also delves into categorical uncertainty, including Economic Policy Uncertainty (EPU), Climate Policy Uncertainty (CPU), and Trade Policy Uncertainty (TPU). These forms of uncertainty can have profound effects on economic activities, market behaviour, and investment decisions. Furthermore, the paper discusses an innovative approach to measuring uncertainty using online big data, particularly Twitter-based uncertainty indices. These indices provide real-time insights into public sentiment and have been shown to impact stock market forecasts, although they are not without limitations, such as potential manipulation and data representativeness issues. The impact of uncertainty on financial markets is multifaceted, affecting different asset classes differently. High uncertainty can lead to increased volatility in stock markets, while oil and digital currency markets are also sensitive to geopolitical and economic uncertainties. The role of technology and algorithmic trading in uncertain markets is highlighted, with High-Frequency Trading (HFT) becoming increasingly prevalent. HFT can provide speed and efficiency but is a subject of debate regarding its impact on market stability. Future research trends may continue to focus on the intersection of technology and market uncertainty, seeking to better understand its implications and potential risks.