@oliversnow

Non-official regulatory statements increase policy uncertainty, which can be modeled via a Policy Uncertainty Index. Constructing this index involves tracking media mentions, regulator speeches, and social media sentiment around ambiguous guidance. Higher index levels correlate with wider spreads and elevated volatility. Incorporating this into asset pricing models introduces a “policy risk premium,” raising expected returns to compensate for uncertainty. Backtests show spikes in uncertainty often precede volatility surges. For portfolio managers, including such indices allows proactive de-risking. Over time, structured uncertainty measurement improves robustness of pricing models against regulatory noise.

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