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Home / SNB News / WP – 2024-10-16 – Francesco Audrino, Jessica Gentner and Simon Stalder: Quantifying uncertainty: a new era of measurement through large language models

WP – 2024-10-16 – Francesco Audrino, Jessica Gentner and Simon Stalder: Quantifying uncertainty: a new era of measurement through large language models

Summary:
This paper presents an innovative method for measuring uncertainty via large language models (LLMs), which offer greater precision and contextual sensitivity than the conventional methods used to construct prominent uncertainty indices. By analysing newspaper texts with state-of-the-art LLMs, our approach captures nuances often missed by conventional methods. We develop indices for various types of uncertainty, including geopolitical risk, economic policy, monetary policy, and financial market uncertainty. Our findings show that shocks to these LLM-based indices exhibit stronger associations with macroeconomic variables, shifts in investor behaviour, and asset return variations than conventional indices, underscoring their potential for more accurately reflecting uncertainty.

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This paper presents an innovative method for measuring uncertainty via large language models (LLMs), which offer greater precision and contextual sensitivity than the conventional methods used to construct prominent uncertainty indices. By analysing newspaper texts with state-of-the-art LLMs, our approach captures nuances often missed by conventional methods. We develop indices for various types of uncertainty, including geopolitical risk, economic policy, monetary policy, and financial market uncertainty. Our findings show that shocks to these LLM-based indices exhibit stronger associations with macroeconomic variables, shifts in investor behaviour, and asset return variations than conventional indices, underscoring their potential for more accurately reflecting uncertainty.

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The Swiss National Bank conducts the country’s monetary policy as an independent central bank. It is obliged by the Constitution and by statute to act in accordance with the interests of the country as a whole. Its primary goal is to ensure price stability, while taking due account of economic developments. In so doing, it creates an appropriate environment for economic growth.

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