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School Research Seminar - United We ‘Fall’, Divided They ‘Stand’: The Salience of Uncertainty and Financial Variables

18 November 2015

1:00 - 2:00pmFB 4.04/4.08 (Lunch from 12:30pm in the kitchen)

(40 minute talk and 20 minute Q&A)

Speaker name & affiliation

Taufiq Choudhry, University of Southampton Business School

Seminar title

United We ‘Fall’, Divided They ‘Stand’: The Salience of Uncertainty and Financial Variables

Abstract

Does macroeconomic (policy) uncertainty co-move with stock prices and real economic activities? The developing literature have provided some directions. However, there is little that can be said on how the persistence nature of uncertainty would exert variable short- and long-run effects on real economic and financial activities. The current paper aims to contribute to this sparse literature by offering a new framework towards characterizing short- and long-run (dis)-equilibrium relationship between uncertainty and real economic activities. Our empirical framework is built on endogenous growth setting with slowly-convergent shocks. We employ a fractional vector autoregression mechanism to estimate equilibrium effects of uncertainty. This model is well suited for the analysis because it allows multiple fractional time series and admits simple asymptotic inference for the model parameters and tests of the hypotheses of interest. Due at least in part to the considerable amount of disagreement over whether uncertainty should have implications like a ‘long-wave’ depicting far larger and slower adjustment to shocks or ‘smaller wave’ depicting regular adjustment of financial/macroeconomic variables to uncertainty, our framework estimates the dynamic nature of interdependence between uncertainty and economic/financial market activities. By admitting a fractional integration structure, we derive, using data from the US, the long-run equilibrium relationship and demonstrate how possible slow-adjustment of uncertainty shocks to real variables produce persistent countercyclical effects.

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