Advances in Measuring Firm-Level Uncertainty
Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Derek Lemoine, University of Arizona and NBER
Uncertainty Is More Than Risk - Survey Evidence on Knightian and Bayesian Firms
AbstractDo firms think in terms of probabilities? Using a new module in the ifo manufacturing business cycle survey from Germany, we give firms an option to express expectations about their future sales growth with either probabilities or probability intervals. While at any given point in time, most firms (70-80 percent) choose to answer with probabilities, roughly three quarters of the firms choose an interval (Knightian response) at least once in the four year sample we observe them. Bayesian expectation expression thus does not appear to be a fixed firm type; rather, there is a lot of churn between Bayesian and Knightian responses. We show that Knightian responses are not the result of weaker numeracy of the respondents. Knightian responses are more prevalent at smaller and non-exporting firms, they tend to be more persistent for small firms, and they are correlated with lower capacity utilization at the firm level. At the macro level, Knightian responses increase with the Greek crisis, which we show to be mainly driven by large and exporting firms.
What Were the Odds? Estimating the Market's Probability of Uncertain Events
AbstractThe event study methodology has been widely used in economics and finance to understand the effect of events on firms' stock prices. However, without knowledge of the probability that market actors placed on the event before it happened, this approach can only bound the full magnitude of the effect of an event on firm valuations. We develop two nonparametric methods for recovering the market's priced-in probability of events from the prices of widely traded financial options. These methods involve running an event study on options prices in addition to the standard event study in stock prices. We demonstrate the power of our new methods through applications to prominent events in health care regulation: we recover election probabilities broadly consistent with polling data and also recover probabilities for events such as court cases that lack either polling data or prediction markets.
The Global Impact of Brexit Uncertainty
AbstractUsing tools from computational linguistics, we construct new measures of the impact of Brexit on listed firms in the United States and around the world; these measures are based on the proportion of discussions in quarterly earnings conference calls on the costs, benefits, and risks associated with the UK's intention to leave the EU. We identify which firms expect to gain or lose from Brexit and which are most affected by Brexit uncertainty. We then estimate effects of the different types of Brexit exposure on firm-level outcomes. We find that the impact of Brexit-related uncertainty extends far beyond British or even European firms; US and international firms most exposed to Brexit uncertainty lost a substantial fraction of their market value and have also reduced hiring and investment. In addition to Brexit uncertainty (the second moment), we find that international firms overwhelmingly expect negative direct effects from Brexit (the first moment) should it come to pass. Most prominently, firms expect diffculties from regulatory divergence, reduced labor mobility, limited trade access, and the costs of post-Brexit operational adjustments. Consistent with the predictions of canonical theory, this negative sentiment is recognized and priced in stock markets but has not yet significantly affected firm actions.
- D8 - Information, Knowledge, and Uncertainty
- G1 - General Financial Markets