Measuring Macroeconomic Tail Risk

Roberto Marfe () and Julien Penasse

No 621, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: This paper proposes a predictive approach to estimate macroeconomic tail risk dynamics over the long run (1876-2015). Our approach circumvents the scarcity of large macroeconomic crises by using observable predictive variables in a large international panel. This method does not require to use asset price information, which allows us to evaluate the empirical validity of rare disasters models. We find that macroeconomic crises are forecastable by a broad array of variables. In particular, our macro risk estimate covaries with asset prices and forecasts future stock returns. This suggests, in line with the rare disaster paradigm, that the equity premium varies over time because agents care about macroeconomic risk. A rare disaster model, calibrated from macroeconomic data alone, further supports this interpretation.

Keywords: rare disasters; equity premium; return predictability. (search for similar items in EconPapers)
JEL-codes: E44 G12 G17 (search for similar items in EconPapers)
Pages: pages 71
Date: 2020
New Economics Papers: this item is included in nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Measuring macroeconomic tail risk (2024)
Working Paper: Measuring Macroeconomic Tail Risk (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:621

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