Economic Program | Report

Financial Fear Factor: Has the Fiscal Cliff Been Priced In?

by Jim Kessler, Lauren Oppenheimer and David Hollingsworth

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The deadline for the fiscal cliff is approaching and things are getting dicey in Washington. The likely increased volatility and uncertainty could roil the markets. But can you measure uncertainty?

Yes. Investors developed an index that reflects market uncertainty, called the Volatility Index (VIX)—it’s known on Wall Street as the “fear gauge.” They watch it every day, and you should know about it too.

This paper dissects the fear gauge and shows that even a short term failure to avert a fiscal cliff crisis could have a serious impact on the economy.

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