Nowcasting Tail Risks to Economic Activity with Many Indicators

63 Pages Posted: 14 May 2020 Last revised: 22 Sep 2020

See all articles by Andrea Carriero

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Todd E. Clark

Federal Reserve Bank of Cleveland

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 22, 2020

Abstract

This paper focuses on nowcasts of tail risk to GDP growth, with a potentially wide array of monthly and weekly information. We consider different models (Bayesian mixed frequency regressions with stochastic volatility, as well as classical and Bayesian quantile regressions) and also different methods for data reduction (either forecasts from models that incorporate data reduction or the combination of forecasts from smaller models). Our results show that, within some limits, more information helps the accuracy of nowcasts of tail risk to GDP growth. Accuracy typically improves as time moves forward within a quarter, making additional data available, with monthly data more important to accuracy than weekly data. Accuracy also typically improves with the use of financial indicators in addition to a base set of macroeconomic indicators. The better-performing models or methods include the Bayesian regression model with stochastic volatility, Bayesian quantile regression, some approaches to data reduction that make use of factors, and forecast averaging. In contrast, simple quantile regression performs relatively poorly.

Keywords: forecasting, downside risk, pandemics, big data, mixed frequency, quantile regression

JEL Classification: C53, E17, E37, F47

Suggested Citation

Carriero, Andrea and Clark, Todd E. and Marcellino, Massimiliano, Nowcasting Tail Risks to Economic Activity with Many Indicators (September 22, 2020). FRB of Cleveland Working Paper No. 20-13R2, Available at SSRN: https://ssrn.com/abstract=3599285

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy
(39 02) 5836 3300 (Phone)
(39 02) 5836 3302 (Fax)

Todd E. Clark (Contact Author)

Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States
216-579-2015 (Phone)

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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