Uncertainty and Risk Premium in the USA Stock Market

Relevance of the topic. In economic theory, the terms risk and uncertainty were delimited in 1921 by the American scientist Frank Knight. From the moment of the discovery of uncertainty until the last quarter of the 20th century, economic theory was able to explain only the first type of uncertainty - risk. Nicholas Bloom, M. Ayhan Köse and Marco E. Terrones in their article “Held by Uncertainty” argue that the slow economic recovery in the new millennium is justified by the increased uncertainty, and explaining its impact on the state’s economy is one of the most important tasks for economists today. One of the areas of application of the concept of the existence of uncertainty is the analysis of investment behavior. Uncertainty is a phenomenon whose significance we cannot observe and, accordingly, measure in an explicit form. However, there are a number of dimensions (indices) that attempt to illuminate one or another aspect of uncertainty. In this paper, an attempt is made to empirically analyze uncertainty by means of the most frequently used indexes that analyze the phenomenon of uncertainty in a particular segment or branch of life. In this paper, an attempt is made to assess the impact of uncertainty in the stock market on the amount of risk premium (ERP) based on the use of indexes developed by leading world universities and analytical agencies in the economic (EPU Index) and political (CNTS 9 Index) spheres and in the stock market (Volatility Index). The object of this work is investment behavior in conditions of uncertainty, the subject is modeling the impact of uncertainty on the risk premium. The aim of the work is to analyze the relationship of the currently most used uncertainty indices and risk premiums and determine the direction of the relationship. In the framework of this study, the following tasks were set: 1. To study the theoretical foundations of modeling behavior in the face of uncertainty (Theory of expected utility, Theory of perspectives, Theory of maximin of expected utility); 2. Consider the Puzzle of the risk premium and the concept of its resolution; 3. Describe the indices used and the methodology for calculating the Risk Premium; 4. Briefly describe the empirical model used and the procedure for its assessment; 5. Build a model of the mutual influence of the indices of uncertainty and the value of the risk premium, evaluate the statistical relationship and its direction; 6. To draw conclusions about the application of the concept of uncertainty in the study of investment behavior. Scientific information base of the study. When carrying out the research, scientific articles and monographs, databases (open and subscribed to the Higher School of Economics), articles in well-known analytical journals were used. The scientific novelty of this work consists in the aggregation of several modern models of decision theory, the study of their advantages and disadvantages. An independent study of the relationship between uncertainty indices and one of the indicators of the stock market - risk premium on the example of the United States of America should be noted. The practical significance of the study lies in the fact that the results of an analysis of the impact of political and economic measures on the country's stock market (in particular, on a risk premium) can be used to build a policy for attracting investments. The content of the dissertation. This study consists of an introduction, two chapters (7 paragraphs), a conclusion and a list of used literature. At the end of the paper, the critical results of evaluating the model as Applications are presented. The work consists of 68 pages, contains 95 sources and 6 Appendices. The first chapter provides a brief description of the theoretical concepts of uncertainty and the characteristics of human behavior in conditions of uncertainty. The second chapter is devoted to an independent empirical study of the relationship between uncertainty indices and risk premiums using the example of the US economy.