Modeling and Forecasting Macroeconomic Downside Risk

100 Pages Posted: 18 Aug 2020 Last revised: 29 Mar 2022

See all articles by Andrea De Polis

Andrea De Polis

University of Warwick - Warwick Business School

Davide Delle Monache

Bank of Italy

Ivan Petrella

University of Warwick - Finance Group; University of Warwick - Warwick Business School; University of Warwick; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

We model permanent and transitory changes of the predictive density of US GDP growth. A substantial increase in downside risk to US economic growth emerges over the last 30 years, associated with the long-run growth slowdown started in the early 2000s. Conditional skewness moves procyclically, implying negatively skewed predictive densities ahead and during recessions, often anticipated by deteriorating financial conditions. Conversely, positively skewed distributions characterize expansions. The modelling framework ensures robustness to tail events, allows for both dense or sparse predictor designs, and delivers competitive out-of-sample (point, density and tail) forecasts, improving upon standard benchmarks.

Keywords: Business cycle, Downside risk, financial conditions, score driven models, Skewness

JEL Classification: C53, E32, E44

Suggested Citation

De Polis, Andrea and Delle Monache, Davide and Petrella, Ivan and Petrella, Ivan and Petrella, Ivan, Modeling and Forecasting Macroeconomic Downside Risk (July 2020). CEPR Discussion Paper No. DP15109, Available at SSRN: https://ssrn.com/abstract=3674885

Andrea De Polis (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Davide Delle Monache

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Ivan Petrella

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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