Macroeconomic Effects from Sovereign Risk vs. Knightian Uncertainty
Ruben Staffa
IWH Discussion Papers,
No. 27,
2023
Abstract
This paper compares macroeconomic effects of Knightian uncertainty and risk using policy shocks for the case of Italy. Drawing on the ambiguity literature, I use changes in the bid-ask spread and mid-price of government bonds as distinct measures for uncertainty and risk. The identification exploits the quasi-pessimistic behavior under ambiguity-aversion and the dealer market structure of government bond markets, where dealers must quote both sides of the market. If uncertainty increases, ambiguity-averse dealers will quasi-pessimistically quote higher ask and lower bid prices – increasing the bid-ask spread. In contrast, a pure change in risk shifts the risk-compensating discount factor which is well approximated by the change in bond mid-prices. I evaluate economic effects of the two measures within an instrumental variable local projection framework. The main findings are threefold. First, the resulting shock time series for uncertainty and risk are uncorrelated with each other at the intraday level, however, upon aggregation to monthly level the measures become correlated. Second, uncertainty is an important driver of economic aggregates. Third, macroeconomic effects of risk and uncertainty are similar, except for the response of prices. While sovereign risk raises inflation, uncertainty suppresses price growth – a result which is in line with increased price rigidity under ambiguity.
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Herding Behavior and Systemic Risk in Global Stock Markets
Iftekhar Hasan, Radu Tunaru, Davide Vioto
Journal of Empirical Finance,
September
2023
Abstract
This paper provides new evidence of herding due to non- and fundamental information in global equity markets. Using quantile regressions applied to daily data for 33 countries, we investigate herding during the Eurozone crisis, China’s market crash in 2015–2016, in the aftermath of the Brexit vote and during the Covid-19 Pandemic. We find significant evidence of herding driven by non-fundamental information in case of negative tail market conditions for most countries. This study also investigates the relationship between herding and systemic risk, suggesting that herding due to fundamentals increases when systemic risk increases more than when driven by non-fundamentals. Granger causality tests and Johansen’s vector error-correction model provide solid empirical evidence of a strong interrelationship between herding and systemic risk, entailing that herding behavior may be an ex-ante aspect of systemic risk, with a more relevant role played by herding based on fundamental information in increasing systemic risk.
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