Good and Bad Uncertainty - the new research

Uncertainty has been one of the key research areas since the Great Recession. There are many who view that the high level of uncertainty has been holding back current economic growth.One of the more interesting pieces of research I have come across recently has been on the topic of good and bad uncertainty. See "Good and Bad Uncertainty: Macroeconomic and Financial Implications"  by Gil Segal, Ivan Shaliastovich and Amir Yaron. We always think of uncertainty as a bad thing, but uncertainty can be decomposed into good and bad types base don the semivariance of consumption and production. 

Good uncertainty is technological innovation while bad uncertainty will be negative events like the Lehman failure. The first is good for economic growth while the second is clearly destructive. Both contribute to equity risk premium but have opposite signs for the market price of risk.

There are a lot of assumptions and details with this paper, but the the key concept is important. Uncertainty is a priced risk, but it can have good effects not just bad ones. We should embrace good uncertainty and protect against bad. The hard part is telling which type of uncertainty we face. In most cases, this may seem obvious but even good uncertainty can be disruptive for some companies and therefore has priced risks.