Endogenous Second Moments: A Unified Approach to Fluctuations in Risk, Dispersion, and Uncertainty

Straub, Ludwig and Ulbricht, Robert (2016) Endogenous Second Moments: A Unified Approach to Fluctuations in Risk, Dispersion, and Uncertainty. TSE Working Paper, n. 16-664, Toulouse

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Official URL: http://tse-fr.eu/pub/30521

Abstract

Many important statistics in macroeconomics and finance—such as cross-sectional dispersions, risk, volatility, or uncertainty—are second moments. In this paper, we explore a mechanism by which second moments naturally and endogenously fluctuate over time as nonlinear transformations of fundamentals. Specifically, we provide general results that characterize second moments of transformed random variables when the underlying fundamentals are subject to distributional shifts that affect their means, but not their variances. We illustrate the usefulness of our results with a series of applications to (1) the cyclicality of the cross-sectional dispersions of macroeconomic variables, (2) the dispersion of MRPKs, (3) security pricing, and (4) endogenous uncertainty in Bayesian inference problems.

Item Type: Monograph (Working Paper)
Language: English
Date: June 2016
Place of Publication: Toulouse
Uncontrolled Keywords: Cross-sectional dispersion, endogenous uncertainty, monotone likelihood ratio property, nonlinear transformations, risk, second moments, volatility
JEL codes: C19 - Other
D83 - Search; Learning; Information and Knowledge; Communication; Belief
E32 - Business Fluctuations; Cycles
G13 - Contingent Pricing; Futures Pricing
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 21 Jun 2016 12:36
Last Modified: 11 Apr 2018 15:42
OAI ID: oai:tse-fr.eu:30521
URI: http://publications.ut-capitole.fr/id/eprint/22149

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