That’s the title of an article by Cascaldi-Garcia et al. (2023) within the Journal of Financial Literature. I summarize a few of the key findings beneath.
- Threat: Applies to conditions through which the
end result is unknown to determination makers, however the chance distribution
governing the end result is understood”
- Volatility. Usually used synonymously with
danger, volatility is a statistical measure of the variation in noticed outcomes
- Uncertainty. Characterised by each an
unknown end result and an unknown chance distribution
Be aware the important thing distinction between danger and uncertainty. Citing Caballero 2010, the article notes:
When brokers notice that their assumptions about danger are not legitimate and circumstances of uncertainty apply, their worry about surprising losses can ravage monetary markets.
Beneath I summarize 4 other ways to measure uncertainty: (i) news-based, (ii) survey-based, (iii) asset-based, and (iv) econometric.
This strategy makes use of mentions of various kinds of danger and
newspapers and different media as a quantitative measure of uncertainty. Examples embody financial coverage uncertainty
(EPU) index developed by Baker, Bloom,
and Davis (2016), index of financial coverage uncertainty (MPU) developed by Husted,
Rogers and Solar (2020), and a commerce insurance policies uncertainty (TPU) index
developed by Caldara
et al. (2020). Ahir, Bloom and Furceri (2022) created
a World Uncertainty Index (WUI), which is a GDP-weighted common of
country-level uncertainty indexes.
Of explicit curiosity, the Baker, Bloom and David article constructed
“…a health-care EPU index by looking
for articles that debate rising EPU in addition to phrases equivalent to ‘well being care,’ ‘Medicaid,’
‘Medicare,’ ‘medical health insurance,’ ‘reasonably priced care act,’ and ‘medical insurance coverage
The strategy is beneficial as it could actually have a look at future danger—particularly geopolitical—however is probably going biased in direction of the notion of editorship at main media firms. Additional, causation could also be problematic because the suggestion of extra (or much less) danger at main media entities could affect public perceptions.
This strategy asks people to contemplate quite a lot of
totally different situations and place a chance related to every. Then one can measure uncertainty based mostly on the
commonplace deviation of the responses within the survey. Ex-ante measures sometimes
ask respondents about level predictions (e.g., imply expectation) of future
occasions (e.g., inflation, GDP, gross sales development) at a future time interval.
Aggregating particular person responses permits for the estimation of a measure of the
dispersion throughout respondents relating to the purpose prediction. This calculates
uncertainty throughout people. Different surveys additionally ask people in regards to the chance
of sure occasions occurring and thus can get inside particular person uncertainty as
nicely. Ex-post measures of uncertainty in contrast deviations of current financial
knowledge releases from consensus expectations.
Like all metrics of uncertainty,
these have each professionals and cons.
“…survey-based measures enable precision in regards to the
sector through which the uncertainty is situated (e.g., corporations, households, or
merchants), the financial measure (e.g., employment, expenditures, coverage), and
the horizon over which the uncertainty prevails. Nonetheless, these measures have a tendency
to be out there at a decrease frequency and therefore probably stale relative to, say,
news-based or market-based measures.”
Econometric approaches use knowledge estimation strategies and
equate uncertainty with lack of predictability of mixture exercise. One measure
of uncertainty is value-at-risk (VaR), which is outlined as a threshold such
that the chance of a particular end result not exceeding this threshold is
equal to a desired stage. The
chances are sometimes computed based mostly on quantile regressions. Extra broadly:
“In comparison with different measures of uncertainty, econometric-based measures have the benefit of being straight grounded in—and guided by—statistical inference, they usually replicate the “massive image” in the identical sense as news-based measures. Nonetheless, econometric-based measures can be found at decrease frequencies and could also be considerably totally different when estimated on ex put up revised knowledge versus real-time knowledge” The article cites a paper by Jurado, Ludvigson, and Ng (2015), which makes use of a factor-augmented forecasting mannequin as follows:
Historic volatility in asset returns and rates of interest is
one method to measure. Asset-based measures are inclined to replicate the view of market
members actively buying and selling in a single explicit asset market and thus could solely
be pricing in danger that impacts that exact asset.
“One broadly used uncertainty measure is the VIX, the Chicago
Board of Choices Change’s (CBOE) Volatility Index, an index calculated utilizing
fairness index choices and measuring market members’ expectations for the
volatility of the S&P 500 index over the approaching 30 days.”
The system for VIX is as follows:
One other measure is realized volatility (RV), which is outlined
because the scaled sum of squared day by day returns. RV is taken into account to be an enchancment
over generalized autoregressive conditional heteroskedasticity (GARCH). As
asset based mostly measures usually have giant pattern dimension and are ceaselessly measured,
one can readily seize greater order moments as nicely (e.g., skewness and kurtosis).
The evaluation paper sadly doesn’t contact a lot on well being—besides as how COVID-19 impacted the worldwide economic system and the well being care EPU by Baker et al.—however however it does present a healthful overview of risk-related metrics. These empirical approaches for measuring danger utilizing numerous sources (information, surveys, econometric approaches, and asset costs)–might readily be tailored for well being care functions, specifically the information and survey-based measures.