Market uncertainty, risk aversion, and macroeconomic expectations
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Market uncertainty, risk aversion, and macroeconomic expectations John Nkwoma Inekwe1 Received: 21 August 2017 / Accepted: 4 May 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract In a dynamic model, this paper characterises the interaction between macroeconomic expectation, risk aversion, and market uncertainty. From survey dispersion forecast, we capture macroeconomic expectation using monetary policy uncertainty, business outlook, and consumer confidence, while risk aversion and market uncertainty measures are derived from realised and implied volatilities. We find that shocks to these dispersion measures significantly affect market uncertainty, risk aversion, and macroeconomic variables. Shocks to monetary policy certainty, business outlook, and consumer confidence significantly lower risk aversion and market uncertainty. Shocks to monetary policy stance have a persistent, but minute effect on risk aversion, uncertainty, and macroeconomic variables. Keywords Monetary policy · Survey · Business confidence · Uncertainty · Risk aversion JEL Classification G1 · E44 · E52
1 Introduction It is understood that monetary policy plays a significant role in macroeconomic fluctuations. A change in the policy rate of any economy gives the impression of a central bank’s response to economic instability. In recent times, the importance of financial market frictions in structural models of monetary policy has also been recognised. The interplay between monetary policy, uncertainty, and market risk aversion shocks is important to policymakers and researchers (see Bekaert et al. 2013; Inekwe 2015; Jovanovic and Zimmermann 2010).
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John Nkwoma Inekwe [email protected] Department of Applied Finance, Macquarie University, Sydney, Australia
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J. N. Inekwe
Drawing from both theoretical and empirical papers on uncertainty and economic fluctuations, we contribute to the existing knowledge by characterising the dynamic relationship between monetary policy uncertainty/stance and risk aversion/uncertainty. In addition, we contribute to the existing studies by examining the relative importance of monetary policy certainty, business outlook, and consumer confidence in driving risk-taking behaviour and market uncertainty. Thus, we study risk aversion and uncertainty in the US economy over the past two decades in order to explore the relative roles of macroeconomic variables that are obtained from survey expectation as contributors to uncertainty and market risk aversion. To capture macroeconomic expectation, we employ varying measures such as business outlook survey, survey about consumer confidence, uncertainty and certainty surrounding monetary policy. We also study the monetary policy stance for comparison to the effect of monetary policy uncertainty. To capture the uncertainty surrounding monetary policy, we employ dispersion in survey responses from the survey of professional forecasters (SPF). We capture monetary policy stance with monetary aggregate (M1) and employ business survey diffusion and co
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