Abstract
Since 1999, the European Central Bank (ECB) conducts a quarterly survey of the economic outlook in the euro area among professional forecasters. This article investigates the relationship between macroeconomic uncertainty, measured as the dispersion in economic forecasts across survey participants, and financial market volatility. We find a significant positive short-run relationship between stock market volatility and uncertainty about the future level of economic activity. In contrast, bond market volatility is mainly affected by inflation uncertainty. In addition, we find long-run cointegration relationships between asset market volatilities and macroeconomic uncertainties. We also investigate the sensitivity of our results to the inclusion of the extremely volatile post-Lehman period.
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