A Portfolio-Based Measure of Economic Uncertainty

Financial uncertainty and macroeconomic uncertainty are commonly proxied separately by the volatility of stock returns or key macroeconomic variables, respectively. We propose a portfolio-based measure (PBMEU) that aims to capture aggregate uncertainty in both financial markets and the macroeconomy. Our measure focuses on the volatility of a broad market portfolio including stocks, bonds, and commodities, where correlations between these individual markets have significant implications for the consequences of shocks to economy. When there are significant and persistent economy-wide shocks, the PBMEU produces higher level of uncertainty than the sum of financial and macroeconomic uncertainties, and in turn yields more significantly negative effects on macroeconomy. This asymmetric effect cannot be ascertained by the commonly used proxies such as VIX, aggregate uncertainty of Jurado et al. (2015) and economic policy uncertainty of Baker, et al. (2015)