Forecasting Tail Risks
Journal of Applied Econometrics, Forthcoming
43 Pages Posted: 4 Nov 2015
Date Written: November 3, 2015
This paper presents an early warning system as a set of multi-period forecasts of indicators of tail real and financial risks obtained using a large database of monthly U.S. data for the period 1972:1-2014:12 Pseudo-real time forecasts are generated from: (a) sets of autoregressive and factor-augmented VARs, and (b) sets of auto-regressive and factor-augmented Quantile Projections. Our key finding is that forecasts obtained with AR and factor-augmented VAR forecasts significantly underestimate tail risks, while Quantile Projections deliver fairly accurate forecasts and reliable early warning signals for tail real and financial risks up to a one-year horizon.
Keywords: tail risks, density forecasts, factor models, quantile projections
JEL Classification: C500, E300, G200
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