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.


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

  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.

    Car Leasing Classifieds

  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 ;-)

  4. When you think of your home or business, you think of a safe haven. We offer house security systems and comprehensive security.

  5. When you think of your home or business, you think of a safe haven. We offer top 10 home security companies and comprehensive security.

  6. 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.