Modeling and Forecasting Macroeconomic Downside Risk

100 Pages Posted: 25 May 2021

See all articles by Davide Delle Monache

Davide Delle Monache

Bank of Italy

Andrea De Polis

University of Warwick - Warwick Business School

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: March 16, 2021

Abstract

We document a substantial increase in downside risk to US economic growth over the last 30 years. By modelling secular trends and cyclical changes of the predictive density of GDP growth, we find an accelerating decline in the skewness of the conditional distributions, with significant, procyclical variations. Decreasing trend-skewness, which turned negative in the aftermath of the Great Recession, is associated with the long-run growth slowdown started in the early 2000s. Short-run skewness fluctuations imply negatively skewed predictive densities ahead of and during recessions, often anticipated by deteriorating financial conditions, while positively skewed distributions characterize expansions. The model delivers competitive out-of-sample (point, density and tail) forecasts, improving upon standard benchmarks, due to the strong signals of increasing downside risk provided by current financial conditions.

Keywords: business cycle, financial conditions, downside risk, skewness, score driven models

JEL Classification: C12, C22, C51, C53, E37, E44

Suggested Citation

Delle Monache, Davide and De Polis, Andrea and Petrella, Ivan and Petrella, Ivan and Petrella, Ivan, Modeling and Forecasting Macroeconomic Downside Risk (March 16, 2021). Bank of Italy Temi di Discussione (Working Paper) No. 1324, Available at SSRN: https://ssrn.com/abstract=3852363 or http://dx.doi.org/10.2139/ssrn.3852363

Davide Delle Monache (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea De Polis

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Ivan Petrella

University of Warwick ( email )

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

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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