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Dr. Brandon Julio
Associate Professor of Finance
Alumni Investment Management Research Scholar
Lundquist College of Business

We examine the dynamic relationship between economic conditions and text-based proxies for policy uncertainty. Bad economic conditions predict higher future measures of policy uncertainty. More than 50% of the time series variation in most uncertainty proxies can be explained by lagged macroeconomic factors. We decompose the indices into two parts: a macro component explained by past economic innovations and a residual component containing shocks that are orthogonal to lagged economic activity. We find that the negative relationship between policy uncertainty proxies and corporate investment is driven solely by the macro component. The results suggest that text-based proxies for uncertainty include significant first-moment shocks that confound inferences about the causal impact of policy uncertainty on investment.