Macro Uncertainty Research Articles

Riding the waves of investor sentiment: Cryptocurrency price and renewable energy volatility during the pandemic-war era

This study explores the interplay between cryptocurrency price volatility and renewable energy dynamics amid crises, particularly during the COVID-19 pandemic and the Russia-Ukraine conflict. Utilizing a Quantile Vector Autoregression (QVAR) model with daily data from April 1, 2015, to September 23, 2022, we assess the interconnectedness of cryptocurrency volatility, investor sentiment, and energy fluctuations. Our findings reveal a significant temporal variation in systemic connectedness influenced by recent global events. Overall, we observe approximately 30 % connectivity in the short run and 6 % in the long run. Notably, Bitcoin and the Fear and Greed Index shifted roles from net shock receivers to transmitters over various periods. Financial and macro uncertainties primarily acted as shock transmitters during 2017 to early 2022. Furthermore, investor sentiment transitioned from a shock transmitter before the pandemic to a shock receiver during it. The analysis underscores the substantial impact of extraordinary events e.g., the COVID-19 pandemic, the Russia-Ukraine conflict on market dynamics.

Credit Market Frictions and the Linkage Between Dispersion and Macro Uncertainty

Cross-sectional dispersion and macro uncertainty (volatility of aggregate economic variables) are conceptually distinct. However, empirically, they both comove and are countercyclical. This paper builds a general equilibrium model and demonstrates that credit market frictions allow cross-sectional dispersion to drive time-varying macro uncertainty endogenously. In the model, as firm-level productivity becomes more dispersed, more firms are pushed to the left tail of the productivity distribution, resulting in more defaults and a depletion in aggregate net worth. This mechanism generates countercyclical leverage and aggregate volatility. The model implies that the government can inject equity in economic downturns to stabilize aggregate volatility. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.00166 .

Embracing certainty in uncertain times: Macroeconomic uncertainty, third‐party assurance, and CSR performance

AbstractOur study investigates whether macro‐level uncertainty on the future economic prospects, referred to as macroeconomic uncertainty, affects corporate social responsibility (CSR) performance. Two competing theories, namely, the real options theory and the risk management theory, offer different perspectives on whether firms would increase or decrease their CSR performance in response to macroeconomic uncertainty. Existing literature documents inconclusive empirical evidence about this matter. Employing a novel and unbiased measure of macroeconomic uncertainty and drawing upon data from U.S. firms between 2006 and 2017, we find that CSR performance is negatively associated with macroeconomic uncertainty. We also document that the negative association between macro uncertainty and CSR performance is attenuated for firms that have their CSR reports independently assured by third‐party experts. The results are robust to controlling for firm characteristics, an alternative measure of macroeconomic uncertainty, and an alternative sample period excluding the 2008–2009 Financial Crisis.

Analysing the Impacts of Fiscal Decentralisation on Public Services Delivery: Evidence from Health Sector in Pakistan

Delegation of power can of political, social and fiscal authority and all the three has been considered an important policy reform to achieve high growth, better delivery of services and stabilize the macro uncertainties in economy. Among the three types of decentralization, this study was conducted to assess the fiscal aspect of decentralization and its impacts were analyzed on public services deliveries, which is one of the core objectives of power delegation. Pakistan was taken as a sample case. Annual time series data spanning from 1974 to 2021 were sourced from both the World Bank and the economic survey of Pakistan. Fiscal decentralization was measured through fiscal transfers and vertical balances while public services were proxy through health sector. In health sector this study took infant mortality rates because of the ways availability of data. Per capita GDP, Rural-Urban ratio and health expenditures were taken as a control variable. The results were extracted through ARDL and it was found that between the two proxies of fiscal decentralization, fiscal transfers is more effective than vertical balances and therefore it was suggested that government may increase the share of provinces to further improve the delivery of public services in Pakistan.

Max Share Identification of Multiple Shocks: An Application to Uncertainty and Financial Conditions

We generalize the Max Share approach to allow for simultaneous identification of a multiplicity of shocks in a Structural Vector Autoregression. Our machinery therefore overcomes the well-known drawbacks that individually identified shocks (i) tend to be correlated to each other or (ii) can be separated under orthogonalizations with weak economic ground. We show that identification corresponds to solving a nontrivial optimization problem. We provide conditions for non-emptiness of solutions and point-identification, and Bayesian algorithms for estimation and inference. We use the approach to study the effects of uncertainty and financial shocks, allowing for the possibility that the former responds contemporaneously to other shocks, distinguishing macroeconomic from financial uncertainty and credit supply shocks. Using U.S. data we find that financial uncertainty mimics a demand shock, while the interpretation of macro uncertainty is more mixed. Furthermore, variation in uncertainty partially represents the endogenous response of uncertainty to other shocks.

How does the central bank stabilize the stock market under macro uncertainty: Evidence from China stock market

This paper establishes mathematical models and PVAR models to verify the micro transmission path and the validity of central bank communication and actual interest rate intervention on China stock market. Through heterogeneity analysis, we further test whether the level of macroeconomic uncertainty affects their effect. We confirmthat both central bank communication and actual interest rate intervention have a significant effect. However, central bank communication is ineffective in the high macroeconomic uncertainty sample while the interest rate intervention can have a greater effect. Overall, the results suggest that central bank communication is a more effective monetary policy tool on stock market in low macroeconomic uncertainty period, while interest rate intervention is a better choice in high macroeconomic uncertainty period.

Financial and Macro Uncertainty impact on Thai Investment

Financial and Macro Uncertainty impact on Thai Investment

Communities of practice for contemporary leadership development and knowledge exchange through work-based learning

ABSTRACT This study explores the experiences of leaders who have led organisations and teams through an extended period of crisis management whilst completing a UK work-based master’s programme. This paper examines contemporary approaches to work-based learning and explores the effect of organisational and workforce demands in a volatile era of global economic uncertainty. Theoretical and conceptual foundations relating to experiential learning, digital education and communities of learning are analysed and discussed. Taking an inductive qualitative approach, the study analyses semi-structured questionnaire data from senior leaders. The widespread adoption of technology exposes challenges to facilitation and the academic-employer interface, impacting upon learning communities and knowledge exchange opportunities. The findings also suggest enhanced leaders’ adaptive traits, including confidence and self-reliance. This study illuminates critical issues associated with contemporary work-based learning, specifically relating to prolonged macro uncertainty and the effect upon workplaces as sites of knowledge and learning, and risks to dynamic relationships between the psychosocial work environment, genuine opportunities to learn and learner well-being. This work seeks to inform the design of future programs, specifically in terms developing inter and intra-organisational communities of learning and knowledge exchange to enhance best practice and inculcate crucial leadership skills.

Risk spillover in China’s real estate industry chain: a DCC-EGARCH-ΔCoVaR model

Real estate’s role in the financial crisis has forced central banks and academics to focus on the real estate risk’s spillover effects. However, findings on this matter are erratic and could differ from country to country. Prior research mostly ignored risk contagion at the level of the real industry and instead concentrated on real estate and financial institutions. Therefore, to analyze the risk spillover of China’s real estate industry from a novel perspective of the industrial chain, a mixed model (DCC-EGARCH-CoVaR model) is proposed in this work. It fixes the flaw in existing models’ inability to account for asymmetries and the weakness of traditional methods in explaining the time-varying and nonlinear risk infection process. The findings demonstrate that China’s real estate industry has a noticeable risk spillover effect on upstream and downstream industries. The downstream industry is the one most affected by risk spillover from the real estate sector, followed by the upstream industry, and the banking sector is the least affected. The risk spillover effects of macro uncertainties like the COVID-19 outbreak, the financial crisis, and the stock market fall on real estate vary significantly. These findings are helpful for regulators to prevent systematic financial risks and for institutional investors to make timely strategic asset allocations and adjustments.

Micro uncertainty and asset prices

Size and value premia comove strongly with one another at low frequencies, but they are both negatively related to long-run movements in the equity premium. We explain these patterns in an investment-based asset pricing model featuring persistent micro and macro uncertainty. Micro uncertainty generates size and value premia waves, while macroeconomic uncertainty produces equity premium waves. The negative correlation between micro and macro uncertainty at low frequencies explains why the equity premium is a long-term hedge for size and value premia. Persistent micro uncertainty is also a source of instability for size and value factors in short samples.

Macro uncertainty in the long run

The relationship between uncertainty and economic activity has attracted substantial interest in recent macroeconomics literature. Empirical work has mostly focused on short-run effects of uncertainty. However, there are many mechanisms that may cause non zero responses at longer horizons, e.g. the “real option” or the “growth option” channels. This paper explores the consequences of Macro uncertainty shocks at very long horizons using models with dynamic specifications rich enough to allow the effects of uncertainty to propagate far in the future. We find that uncertainty shocks produce two waves of reduction in output: one at short horizons, and another which reaches its trough after eight years from the shock.

Macro Uncertainty Impacts on ESG Performance and Carbon Emission Reduction Targets

This study examines the impact of three macro uncertainty factors: economic policy uncertainty (EPU), political instability (PIS), and cultural uncertainty avoidance (UA), on corporate environmental, social and governance (ESG) performance and carbon emission reduction targets. Additionally, we examine whether these macro factors are affected by the profitability of the company. Using an unbalanced sample of companies located in the USA, China, and the UK during the period 2013–2020, results show that during times of economic uncertainty, companies are more likely to engage in ESG activities, including establishing emission reduction targets. Companies in countries with lower levels of political stability (PS) exhibit greater levels of social and environmental engagements, and companies operating in societies that tolerate risks, including the risk associated with climate change, are more likely to have better ESG performance and be committed to emission reduction targets. The results also suggest that profitable companies are more likely to deal with uncertain environments successfully, as they have the required resources to invest in ESG. The study suggests several practical implications for managers and policymakers.

Time and frequency uncertainty spillover among macro uncertainty, financial stress and asset markets

Purpose This study aims to examine the uncertainty spillover among eight important asset classes (cryptocurrencies, US stocks, US bonds, US dollar, agriculture, metal, oil and gold) using weekly data from 2014 to 2020. This study also examines the US macro uncertainty and US financial stress spillover on these assets. Design/methodology/approach The authors use time–frequency connectedness method to study the uncertainty spillover among the asset classes. Findings This study’s findings revealed that the uncertainty spillover is time-varying and peaked during the 2016 oil supply glut and COVID-19 pandemic. US stocks are the highest transmitter of uncertainty to all other assets, followed by the US dollar and oil. US stocks (US dollar and oil) transmit uncertainty in long (short) term. Furthermore, US macro uncertainty is the net transmitter of uncertainty to the US stocks, industrial metals and oil markets. In contrast, US financial stress is the net transmitter of uncertainty to the US bonds, cryptocurrencies, the US dollar and gold markets. US financial stress (US macro uncertainty) has long (short)-term effects on asset price volatility. Originality/value This study complements the studies on volatility spillover among the important asset classes. This study also includes recently financialized asset classes such as cryptocurrencies, agricultural and industrial commodities. This study examines the macro uncertainty and financial stress spillover on these assets.

Macro‐financial linkages in the high‐frequency domain: Economic fundamentals and the Covid‐induced uncertainty channel in US and UK financial markets

AbstractThis article contributes to our understanding of the macro‐financial linkages in the high‐frequency domain during the recent health crisis. Building on the extant literature that mainly uses monthly or quarterly macro proxies, we examine the daily economic impact on intra‐daily financial volatility by applying the macro‐augmented HEAVY model with asymmetries and power transformations. Our study associates US and UK financial with macroeconomic uncertainties in addition to further macro drivers that exacerbate equity market volatility. Daily local economic policy uncertainty is one of the main drivers of financial volatility, alongside global credit and commodity factors. Higher macro uncertainty is found to increase the leverage and macro effects from credit and commodity markets on US and UK stock market realized volatility. Most interestingly, the Covid‐19 outbreak is found to exert a considerable impact on financial volatilities through the uncertainty channel, given the prevalent worry about controversial policy interventions to support societies and markets, particularly in the case of the severely censured US and UK governments' reluctant and limited response in the very beginning of the pandemic.

A Study on the Impact of Macro Uncertainty on the Volatility of China's Carbon Emissions Trading Market

This paper selects three carbon emissions trading prices in Tianjin, Guangzhou and Hubei for the period 2019-2021 as the samples and conducts a cross-sectional and longitudinal analysis of their volatility. The study shows that: (1) the price volatility and price level of carbon market in the three places differ significantly, and the difference between the highest and lowest price is significant; (2) the standard deviation of the logarithmic return of carbon trading pilot in the three places is large, and the riskiness of carbon trading is high. Based on this, this paper puts forward suggestions in four aspects: accelerating the improvement of basic system guarantee, accelerating the construction of national carbon market system, steadily promoting the construction of national carbon market, and establishing carbon market risk identification and prevention mechanism.

How do fiscal adjustments work? An empirical investigation

Recent empirical evidence suggests that fiscal consolidation based mainly on tax hikes has a more recessionary impact on economic growth than that based on expenditure cuts. This paper evaluates the effects of fiscal adjustment plans identified through the narrative approach on the U.S. macroeconomic activity. To do so, I incorporate fiscal plans into a vector autoregression model to investigate transmission channels of fiscal consolidation and accompanying policy. I check whether monetary policy, uncertainty, or financial markets can explain the heterogeneous effects of fiscal adjustment plans. I find that the financial market and macro uncertainty channels are the most important ones.

Macro Uncertainty in the Long Run

Macro Uncertainty in the Long Run

In no uncertain terms: The effect of uncertainty on credit frictions and monetary policy

We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. The model considers credit frictions arising from costly-state verification in the provision of loans to fund the acquisition of capital by entrepreneurs and includes three types of time-varying stochastic volatility shocks related to monetary policy uncertainty, financial risk (micro uncertainty), and macro uncertainty. Key parameters are estimated by the simulated method of moments using data from the United States from 1984:Q1 until 2014:Q4. We find that (1) micro uncertainty has first-order effects that are significantly larger than the effects of macro uncertainty and monetary policy uncertainty; (2) poor credit conditions exacerbate the economic drag from micro uncertainty shocks, amplify the effects of monetary policy shocks, and mitigate the impact of total factor productivity (TFP) shocks; (3) a degree of asymmetry and nonscalability appears in response to monetary policy shocks depending on the degree of nominal rigidities and initial conditions; and (4) monetary policy uncertainty accounts for about one-third of business cycle volatility largely by affecting the size of monetary policy shocks.

Eye in the sky: Private satellites and government macro data

We develop an approach to identify whether recent technological advancements—such as the rise of commercial satellite-based macro estimates—can provide an alternative to government data. We measure the extent to which satellite estimates affect the value of a government macro announcement using its asset price impact. Our identification relies on cloud cover, which prevents satellites from observing economic activity at a few key hubs. Applying our approach, we find that some satellite estimates are now so effective that markets are no longer surprised by government announcements. Our results point to a future in which the resolution of macro uncertainty is smoother and governments have less control over macro information.

Macroeconomic uncertainty shocks and households’ consumption choice

Exploiting U.S. households’ consumption survey data, we study whether recently developed indices of macroeconomic uncertainty (e.g., Jurado et al., 2015; Baker et al., 2016; Bekaert et al., 2019) affect household consumption choices. We find that positive shocks to financial, real, and macroeconomic uncertainty indices by Jurado et al. (2015), as well as S&P 500 implied volatility (VIX) significantly depress U.S. households’ consumption. We also find that households that are more uncertain about their individual future consumption react to economic uncertainty more sensitively. The real and macro uncertainty indices by Jurado et al. (2015) also have a long-lasting effect on consumption choices, consistent with the habit formation model.