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Dynamic industry uncertainty networks and the business cycle

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Document pages: 57 pages

Abstract: We argue that uncertainty network structures extracted from option pricescontain valuable information for business cycles. Classifying U.S. industriesaccording to their contribution to system-related uncertainty across businesscycles, we uncover an uncertainty hub role for the communications, industrialsand information technology sectors, while shocks to materials, real estate andutilities do not create strong linkages in the network. Moreover, we find thatthis ex-ante network of uncertainty is a useful predictor of business cycles,especially when it is based on uncertainty hubs. The industry uncertaintynetwork behaves counter-cyclically in that a tighter network tends to associatewith future business cycle contractions.

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