Micro-to-Macro Uncertainty

Idiosyncratic volatility in the stock returns of large firms can drive aggregate volatility and real activity. Using daily stock price data for firms in 21 countries over 1999 to 2020, we isolate firm-specific volatility shocks and exploit the fat-tailed distribution of market capitalization to construct a granular instrument for country-level volatility (uncertainty). A one standard deviation increase in aggregate volatility reduces real GDP by 1%, raises unemployment by 1.2 percentage points, and lowers investment by 7% over three years. We validate 389 firm episodes using contemporaneous news coverage and show that narratively verified shocks generate even larger macroeconomic effects.