A Socioeconomic Well-Being Index

Document pages: 19 pages

Abstract: An annual well-being index constructed from thirteen socioeconomic factors isproposed in order to dynamically measure the mood of the US citizenry.Econometric models are fitted to the log-returns of the index in order toquantify its tail risk and perform option pricing and risk budgeting. Byproviding a statistically sound assessment of socioeconomic content, the indexis consistent with rational finance theory, enabling the construction andvaluation of insurance-type financial instruments to serve as contracts writtenagainst it. Endogenously, the VXO volatility measure of the stock marketappears to be the greatest contributor to tail risk. Exogenously, "stress-testing " the index against the politically important factors of tradeimbalance and legal immigration, quantify the systemic risk. For probabilitylevels in the range of 5 to 10 , values of trade below these thresholds areassociated with larger downward movements of the index than for immigration atthe same level. The main intent of the index is to provide early-warning fornegative changes in the mood of citizens, thus alerting policy makers andprivate agents to potential future market downturns.