Expectations, Economic Uncertainty, and Sentiment

Abstract

Objective: this article aims to help unravel if and how economic uncertainty interacts with the informational structure of sentiment. Methods: the empirical strategy is based on a non-linear and non-parametric causality test to investigate the interaction between variables as distributions. This article builds primarily on the literature on expectation formation. Results: it was found that uncertainty based on the media (ex-ante) precedes sentiment, at most, until the second moment of its distribution. In addition, sentiment helps predict the informational structure of fundamental uncertainty (ex-post) and higher order moments of ex-ante uncertainty. Conclusion: sentiment can be considered a channel for uncertainty through the tone of expectations and erroneous expectations. Ex-ante uncertainty measures can also help calibrate the rational cost-benefit calculation of attention by acting as a leading indicator of the increasing value of information.

Agent expectations and news sentiment in the dynamics of price in a financial market

“…Respondents exposed to positive economic "news" were found to only modify expectations that were for the aggregate economy and were prospective. Franco (2022) has addressed economic uncertainty in expectations that follow from the informational structure of sentiment. His results support the inference that sentiment can be a channel for uncertainty as communicated in expectation.…”