Dynamic Industry Uncertainty Networks and the Business Cycle

Industry uncertainty networks extracted from option prices contain valuable information for business cycles. Classifying U.S. industries according to their contribution to system-related uncertainty, we uncover an uncertainty hub role for the communications, financials, IT and real estate industries. Conversely, shocks to industrials, materials, and utilities do not create strong linkages. The ex-ante network of uncertainty is a useful predictor of business cycles, especially when it is constructed from uncertainty hubs which are found to be the main contributors to uncertainty shocks within the system showing a tighter link with the real economy. The stronger predictive ability of the hubs-based network is robust to a wide range of checks, the inclusion of a large set of controls, and it is also confirmed out-of-sample