Thursday, August 18, 2011

Uncertainty causes recession



In a previous post, we showed a negative correlation between the stock market and colleague Bob Whaley's "Volatility Index," VIX.

Recent research shows that volatility spikes are a good predictor of future recessions because:
  • When people are uncertain about the future, they wait and do nothing.
  • Firms do not to hire new employees, or invest in new equipment if they are uncertain about future demand.
  • Consumers do not buy a new car, a new TV, or refurnish their house if they are uncertain about their next paycheck.

The economy grinds to a halt while everyone waits.

5 comments:

  1. For related work, see Bob Higgs's classic paper on "Regime Uncertainty" and how it prolonged the Great Depression:

    http://www.independent.org/publications/tir/article.asp?a=430

    ReplyDelete
  2. I didn't know that uncertainty could lead to recession. But I know that the consumer's purchasing power somehow affects economy and market. I just hope that the US economy will eventually recover and the effects of recession would be eliminated.

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  3. Perception recession?

    I am sure everyone knows this...

    Recession - My neighbor loses his job
    Depression - I lose my job
    Great depression - My wife & I, both work for the same company - lose our jobs ;-)

    ReplyDelete
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  5. There is no doubt that uncertainty always causes troubles, so that’s why we need to be very much careful with how we do anyone. I am able to perform very well and that’s all thanks to been very sure about things and that’s happen with the support that I have in my broker OctaFX, it is a mind blowing company with having daily market analysis for all the stuff, so following that helps me trade easier and always be very much comfortable.

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