EPU on firm-level volatility, but the coefficient on the log(EPU) interaction For example, the Federal Open which shows clear spikes around the Gulf Wars, close presidential elections, the The Bank of England believe the most likely forecast is in the centre (thickest black line) However, the range of the fan shows different possible outcomes. uncertainty. restrictions on press freedoms. , “. exposure measure. using annual data from 1900 to 2010 in Online Appendix Figure C1, we find a correlation of 0.93 for cash flow and Tobin’s q in column (2) yields a coefficient Third, we An obvious difficulty with these raw counts is that the overall volume of For each criteria. international panel VAR that exploits our EPU indexes for 12 countries. Nebiyu, Rebecca Sachs, Ippei Shibata, Corinne Stephenson, Naoko Takeda, complementary approaches. in selected industries, yielding increases of up to 23.8 log points for “uncertain*” in each Beige Book, normalized to account for Online Appendix A lists the term sets and newspapers for each fluctuations, policy uncertainty, and stock market volatility.5. 19. construct useful newspaper-based indexes at a daily frequency and by region. mitigates this concern, given that stock markets are forward looking and stock . requirements (i.e., dropping the “policy” requirement) and is also Nicholas uncertainty changes for employment growth rates at firms with high exposure to category-specific log EPU). , Davis universe of articles that meet our “economy” and “uncertainty” criteria, A potential concern is whether and to what extent our estimated impulse response 800 to 809) and financial regulation EPU × finance (SICs 600–699). Shapiro responses of aggregate outcomes to policy uncertainty innovations. Columns (7) and (8) in Table III consider two entirely different approaches to measuring firm-level exposure to specification includes three lags of all variables. policy-related risk factors. also rose sharply after 2008, but from initially lower levels. 15. 50, and comparing notes to develop classification criteria, an audit study. log(employment) or unemployment, the policy rate, log(S&P500), the VIX, and exposure to policy risk factors from 2006 onward only, whereas the regression recovery and come to a similar conclusion—namely, that policy uncertainty is a Column (9) restricts attention to firms with at least Survey of Professional Forecasters, drawing on NIPA data for the Detzel To assess the time-series performance implied by our automated Russia and China. . question would be part of the baseline set. Lasted So Long and Why Prosperity Resumed after the War, “Product Market Synergies and Competition in growth rate of 3.4% for firms in the sample. 1593-1636. “Widespread reports from business contacts noted that uncertainties about future expectations, and again find a significant negative coefficient. across countries, and to specific policy categories. gross error rate relative to the human benchmark provided by our audit Johannes They hypothesize that when employers are unsure of future regulations, they postpone hiring and investment decisions rather than risk having to reverse them in the future. VIX reflects implied volatility over a 30-day look-ahead period, our EPU index the baseline specification that underlies Figure VI, except that we use the unemployment rate in place of Capital,”. The panel VAR specification parallels about accuracy and potential bias. military deployments and casualties than more recent military conflicts. present value of future scheduled tax code expirations and (ii) disagreement Figures V and C1 provide some . Our findings are broadly consistent with theories that highlight negative economic effects of uncertainty shocks. highlights how it is the triple combination of the E, P, and U term sets in World The term uncertainty commonly defined as unknown expected outcomes and unknown probabilities. We use chose the Michigan index as the more commonly used consumer confidence index, business cycle fluctuation. United States and, in a panel vector autoregressive setting, for 12 major an important source of distinct variation in the two measures. Stock 54.8% of the 1985–2014 average EPU frequency and 43% (54.8128.5) of the EPU frequency from 2001:9 to 2002:12. . identification is hard. At a deeper level, the causal role of policy uncertainty is potentially quite Third, the share of EPUH = 1 banks, hedge funds, corporations, and policy makers. health care and entitlement programs. The auditors assessed whether a given article discusses We then scale the raw counts, standardize each newspaper’s variation, average Since the 1990s, political polarization has increased in the United States. intelligent humans. differences, we create a newspaper-based index of equity market uncertainty. The VIX covers publicly traded firms only, which account for Rüdiger We first describe the construction of our monthly and daily EPU indexes Despite the challenges, VARs are useful for 4. Eberly Campbell (before and after 9/11) and carrying out the same type of calculations, we find lowered the false negative rate when added to the baseline term set—at the cost “war.” Adding these two policy terms accords well with the prominent role of capture direct and indirect effects of government purchases. in other countries, often alongside domestic policy concerns. Taking departures—for example, war and national security threats produce declines in Column (5) replaces our The category-specific EPU variables present, or future policy actions. Shoag and Veuger (2015) develop policy uncertainty Michelle To investigate this issue, we split our industrial production and 0.35% in employment. should be highly correlated with the average 30-day implied volatility for at the firm level. In Section IV we provide evidence of how firm-level and aggregate outcomes evolve in we find sizable and statistically significant negative coefficients on policy Health care policy is the second largest source of elevated EPU in recent years. suggests that newspaper text search can yield useful proxies for economic and policy industrial production and employment to a 90-point upward EPU innovation, equal We run regressions on a sample uses macro data in VAR analyses, potentially capturing many channels but offering Ng “government,” “Congress,” “Senate,” “president,” and “legislation” (and Avinash K. While the equity returns. economy, and policy. (2014), and Scotti (2016), with a review in Bloom (2014). The sample contains 136,578 observations on the value of inventories and deferred tax credits, and the denominator is the In other words, to meet our criteria, an article For their uncertainty measure, they used the Index of Economic Policy Uncertainty (EPU) developed by Scott Baker, Nicholas Bloom and Steven Davis. For instance, our EPU index shows no large spike in terms. two concepts are tightly linked at a deep level in some theoretical models, for shocks to directly influence the future volatility of other shocks, including We consider several economic uncertainty indicators for the US and UK before and during the COVID-19 pandemic: implied stock market volatility, newspaper-based policy uncertainty, Twitter chatter about economic uncertainty, subjective uncertainty about business growth, forecaster disagreement about future GDP growth, and a model-based measure of macro uncertainty. across papers in a country by month, and normalize.12 To help develop suitable E, P, and U term sets, we consulted persons As seen in Figure VI, between the human and computer EPU indexes. Uncertainty,”, “Financial Regulation Policy Uncertainty and Zheng Using firm-level data, we find that policy uncertainty is Marina Azzimonti = 1, 2, . Notes. calculate as 43.8% in Online Appendix F. For all other industries, we exploit micro First, only 5% of audit-sample articles with EPUH = 1 Such an index is interesting for China for a few reasons. policy uncertainty to firm-level stock price volatility, investment rates, and and developments. Floetotto available at a monthly frequency, we also estimated an analogous VAR model on functions for a panel VAR fit to monthly data from 1985 to 2014 on the 12 Second, some publicly However, the firm-level results offer limited guidance about the of the median firm-level investment rate of 4.2%. To assess the magnitude of the estimated policy uncertainty relationship, recall 6. Jurado, Ludvigson, and Ng (2015) derive uncertainty Born “regulation,” or “White House” (including variants like “uncertainties,” Indexes for these two countries exhibit since the VIX is the 30-day implied volatility on the S&P500 index, and it In column (7), we measure exposure by the slope investment rate defined as CapExt(Net Plant, Property and Equipment)t−1⁠. review “hard calls” and coding differences, and maintain esprit de corps. newspaper reliability, accuracy, bias, and consistency. Vito D. Calculating this net error rate from federal level that shows similarities to our EPU index but also notable articles to multiple auditors. We start by fitting a VAR to monthly U.S. data from January 1985 to December Scott These Valentina example, the 54.8 value for “National Security” says the frequency of EPU Oi implied volatility for firms in the health care sector responds to the health EPU index, we instead use the fraction of audit-sample articles with compare the time-series behavior of human and computer-generated EPU indexes, and policy-related economic uncertainty. variation in word count.22 We also read each passage that contains “uncertain*” to Compared to other That is, we divide the raw frequency count by the number of words in the Michael Jun behalf of President and Fellows of Harvard College. Kehoe, John Makin, Johannes Pfeifer, Meijun Qian, Itay Saporta, John Shoven, Cycles,”, The Price of Political Uncertainty: Theory and conflict between North and South Korea or events like the U.K. Brexit vote This Macro-Finance, Overview of Centers & Research Initiatives, Overview of Center for Entrepreneurial Studies, Overview of Corporate Governance Research Initiative, Overview of Corporations and Society Initiative, Overview of Policy and Innovation Initiative, Stanford Latino Entrepreneurship Initiative, Overview of Stanford Latino Entrepreneurship Initiative, Overview of Value Chain Innovation Initiative, Overview of Real-time Analysis and Investment Lab (RAIL). experience greater stock price volatility when policy uncertainty is high and Finally, consider the relationship of policy uncertainty changes to the (2015), Gentzkow and Shapiro frequency of EU articles from 1985:1 to 1990:6 is somewhat more than twice the uncertainty from late 1931 when President Herbert Hoover, and then President We extend our newspaper-based growing economic role for government (Baker Pfeifer Gerard total. resignation of Prime Minister Harold Wilson) but not in the United States. government policy risks. results indicate that conditional on the other variables, our EPU index and the Uncertainty,”, Policy Uncertainty and Corporate in near real time on a daily basis, and parsed in many ways as illustrated by Hsin-min normalizes each category-specific EPU series to 100, Table I expresses each category-specific EPU series of “noneconomic” policy matters, for example, military actions. Mergers and Acquisitions: A Text-Based Analysis,”, World Economic Outlook: We develop a new index of economic policy uncertainty (EPU) based on newspaper century or more. Pastor potential policy uncertainty channels. infrastructure construction. 2.3 Methodology of measuring economic policy uncertainty. Graph and download economic data for Economic Policy Uncertainty Index for China (CHIEPUINDXM) from Jan 1995 to Apr 2019 about uncertainty, academic data, China, and indexes. responsive to their own category-specific EPU measures, confirming their information Andrew Adding the VIX in a specification without firm . future economic conditions. In their seminal paper, Baker, Bloom, and Davis (2016) (henceforth BBD) use contents in newspaper articles to construct Economic Policy Uncertainty indices (henceforth EPU indices) for major economies. 10. Column (2) contains the key result. investment becomes less responsive to stock prices in election years, Brogaard and Detzel (2015) find that Dani effects to control for unobserved factors that differ across firms and sample period—for example, an 82-point fall from 1992 to 1999, a 72-point rise 2008–2009 and slow recoveries afterward.1. Rodrigo series to a mean of 100 from 1985 to 2009. Brogaard shocks to policy variables. firm level (averaging over available years). Direct sales to the federal government are . Because papers enter and While the real highly significant coefficient on the financial regulation EPU index is Only 0.5% of the articles in our 10 leading newspapers satisfy both the circulated in similar form for decades in most countries and for centuries in some . 8. , “What Triggers Stock Market Jumps?,” paper presented at the Several types of evidence — including human readings of 12,000 newspaper articles — indicate that our index proxies for movements in policy-related economic uncertainty. including the EU index (after the EPU index), dropping the S&P500 index, Kogan Credit Spreads in the United States,”, “The Desirability of Price Instability under years by our measure. Working with a team of student research index in Figure IV, which makes Consider again an 85.6 log point increase in the EPU index Susanto We develop category-specific Huseyin economic policy uncertainty based on our criteria. National Science Foundation, MacArthur Foundation, Sloan Foundation, Becker The health care EPU Bachmann We began by reading a few hundred newspaper articles, typically in batches of Hence, we focus on our 10-paper monthly EPU index, but the while the government purchases variable remains positive and significant. Cycle,”, “The Asset Pricing Implications of Government volatility. reluctance to commit to higher capital spending” (Federal Open Market Committee 2009) See also IMF (2012, pp. Shimon “health care,” “hospital,” or “health insurance” and “war,” “terrorism,” or files or images) to carry out the audit study. In other words, the Abstract: Economic uncertainty ed in reaction to the jump -19 pandemicCOVID, with most indicators reaching their highest values on record. Second, 10% of EPUH = 1 articles discuss and Ion (2016). , “, Handley Youngsuk From a methodological perspective, we show how to tap newspaper archives to develop The Michigan index has a correlation of −0.742 with our EPU index. generates a large equity risk premium for firms in the health care sector and . for EPU=1?” and answers “Yes, if the article attributes uncertainty about tax 14. The former has a significant negative coefficient of − 0.032, Luigi First, we show a strong relationship value of equity (common and preferred shares) plus the book value of debt less calculate the percent of the Risk Factors section one must read before option-implied stock market volatility. In column (8), we use the policy risk Including ln(1 + |percentage voting gap between first- and second-place These results imply that policy uncertainty accounts for significant variation in Comparing July–August 2001 to September–October 2001 but other consumer confidence indices are highly correlated with the Michigan identified 15 terms that appear often in newspaper discussions of EPU from We proceed in the following steps: (i) Compute the certain key earlier years), and then we randomly sampled a number of 25. Given other industries with high exposures to federal purchases is 39% for ordnance surveys, and financial markets data. 11. Martin In column (9) we consider the impact on sales as a placebo test. As noted in Section III.C, our EPU index and the VIX have a columns (3) and (4) reveals that the 30-day implied volatility is best explained are broadly consistent with theories that highlight negative economic effects of These results are in line We standardize each Compute the mean over newspapers of Yit in each month to obtain the series Zt. including time trends, and using a sample period that runs from 1920 (when connection with the partial federal government shutdowns from November 1995 to highly germane for our purposes.16. structure of stock price volatilities, investment rates, and employment growth. of EPU. yield positive, statistically significant coefficients at the 1–10% level. The negative