Measuring uncertainty to identify financial instability

Project Lead: Jaroslava Hlouskova
Team: Ines Fortin, Leopold Sögner
Duration: April 2019 – October 2021
Funding: Oesterreichische Nationalbank (OeNB) Anniversary Fund - Project Number 18115


We estimate new indices measuring financial and economic uncertainty in the euro area, Germany, France, the United Kingdom and Austria, following the approach of Jurado et al. (American Economic Review 105: 1177–1216, 2015), which measures uncertainty by the degree of predictability. We perform an impulse response analysis in a vector error correction framework, where we focus on the impact of both local and global uncertainty shocks on industrial production, employment and the stock market. We find that global financial and economic uncertainties have significant negative effects on local industrial production, employment, and the stock market, while we find hardly any influence of local uncertainty on these variables. In addition we perform a forecasting analysis, where we assess the merits of uncertainty indicators for forecasting industrial production, employment and the stock market, using different performance measures. The results suggest that financial uncertainty significantly improves the forecasts of the stock market in terms of profit-based measures, while economic uncertainty gives, in general, more insight when forecasting macroeconomic variables.

Publications

Ines Fortin, Jaroslava Hlouskova, Leopold Sögner (2021): Financial instability and economic activity, IHS Working Paper Series 36

Ines Fortin, Jaroslava Hlouskova, Leopold Sögner (2023): Financial and economic uncertainties and their effects on the economy, Empirica, Vol. 50, 481–521

Conference Presentations

Ines Fortin (presenting), Jaroslava Hlouskova, Leopold Sögner: Financial instability and economic activity, 15th International Conference on Computational and Financial Econometrics (CFE 2021), London, December 2021