An annual well-being index constructed from thirteen socioeconomic factors is
proposed in order to dynamically measure the mood of the US citizenry.
Econometric models are fitted to the log-returns of the index in order to
quantify its tail risk and perform option pricing and risk budgeting. By
providing a statistically sound assessment of socioeconomic content, the index
is consistent with rational finance theory, enabling the construction and
valuation of insurance-type financial instruments to serve as contracts written
against it. Endogenously, the VXO volatility measure of the stock market
appears to be the greatest contributor to tail risk. Exogenously,
"stress-testing" the index against the politically important factors of trade
imbalance and legal immigration, quantify the systemic risk. For probability
levels in the range of 5% to 10%, values of trade below these thresholds are
associated with larger downward movements of the index than for immigration at
the same level. The main intent of the index is to provide early-warning for
negative changes in the mood of citizens, thus alerting policy makers and
private agents to potential future market downturns
