Motivated by the extremely low level of the CBOE VIX accompanied by the high level of U.S. economic policy uncertainty in the period of late 2016 to the end of 2017, we examine the factors affecting the relationship between those two realities. Our analysis shows that the quality of political/economic signals, the divergence of investors’ opinions, and representativeness bias influence the link between the fear gauge and economic policy uncertainty. Specifically, representativeness bias caused by recent low realized volatility weakens the positive relationship between the VIX and policy uncertainty consistently, while the impacts of the quality of political/economic signals and investors’ divergence of opinion depend on the overall level of economic policy uncertainty. Given the level of policy uncertainty, our results allow us to explain the record-low VIX level post the 2016 presidential election.
If you have any copyright and other associated infringements related to this item, please click on the Terms and Conditions link where you will be directed to the Digital Millennium Copyright Act (DCMA) that will outline the procedure for raising your concern.
If you have any concerns with the content of the item [e.g., offensive language and/or material, inappropriate material] then please proceed to utilize the Contact Us form. Remember that when using the Contact Us form, please ensure you reference/cite clearly the item in question (e.g., name of article, author(s) of article) and the nature of the complaint.