EconPapers    
Economics at your fingertips  
 

Assessing Macroeconomic Tail Risks in a Data-Rich Environment

Thomas Cook and Taeyoung Doh

No RWP 19-12, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We use a large set of economic and financial indicators to assess tail risks of the three macroeconomic variables: real GDP, unemployment, and inflation. When applied to U.S. data, we find evidence that a dense model using principal components (PC) as predictors might be misspecified by imposing the “common slope” assumption on the set of predictors across multiple quantiles. The common slope assumption ignores the heterogeneous informativeness of individual predictors on different quantiles. However, the parsimony of the PC-based approach improves the accuracy of out-of-sample forecasts when combined with a sparse model using the dynamic model averaging method. Out-of-sample analysis of U.S. data suggests that the downside risk for real macro variables spiked to by the end of the Great Recession but subsequently declined to a negligible level. On the other hand, the downside tail risk for inflation fluctuated around a non-negligible level even after the end of the Great Recession. The disconnect between the downside risk of inflation and that of real activities can be in line with the evidence for the reduced role of the output gap for inflation during the recent period.

Keywords: Quantile Regressions; Tail Risks; Variable Selection; Dynamic Model Averaging (search for similar items in EconPapers)
JEL-codes: C22 C55 E27 E37 (search for similar items in EconPapers)
Pages: 1-41
Date: 2019-11-20
New Economics Papers: this item is included in nep-mac and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
https://www.kansascityfed.org/documents/4626/Asses ... Rich_Environment.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:87675

Ordering information: This working paper can be ordered from

DOI: 10.18651/RWP2019-12

Access Statistics for this paper

More papers in Research Working Paper from Federal Reserve Bank of Kansas City Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2021-09-21
Handle: RePEc:fip:fedkrw:87675