We propose a daily index of time-varying financial uncertainty. The index is constructed after first removing the common variations in the series, emphasizing on the difference between risk (expected variation) and uncertainty (unexpected variation).

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The construction of our uncertainty index consists of two steps. First, we remove the common component of the series under study and calculate their idiosyncratic variation. To do this, we filter the original series using a generalized dynamic factor model (GDFM). Second, we calculate the stochastic volatility of each residual in the previous step using Markov chain Monte Carlo (MCMC) techniques. Then, we average the series, obtaining a single index of uncertainty for the stock market

Figure 1: US Uncertainty Index: Jan-06-27 to Sept-30-14. Grey areas correspond to NBER