On the different approaches of measuring uncertainty shocks

As uncertainty has become an increasingly prominent source of business cycle fluctuations, various uncertainty proxies have been proposed in the literature. This paper shows that uncertainty measures based on realized variables fluctuate more than the measures that are based on forecasts. More precisely, the variation in the realized cross-sectional standard deviation of profit growth and stock returns is larger than the variation in the forecast standard deviation. Moreover, the forecast standard deviation of profit growth and stock returns are negatively or uncorrelated, the uncertainty measures increase stock returns due to a risk premium, but they decrease profit growth.