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Aggregate skewness and the business cycle

Working papers

Title: Aggregate skewness and the business cycle

Download PDF: Working Paper 53

This paper introduces a new measure to assess the balance of economy-wide risks and shows how changing risks relate to business cycle dynamics.

Authors: Martin Iseringhausen (ESM), Ivan Petrella (University of Warwick, CEPR) and Konstantinos Theodoridis (ESM).



We develop a data-rich measure of expected macroeconomic skewness in the US economy. Expected macroeconomic skewness is strongly procyclical, mainly reflects the cyclicality in the skewness of real variables, is highly correlated with the cross-sectional skewness of firm-level employment growth and is distinct from financial market skewness. Revisions in expected skewness deliver dynamics that are nearly indistinguishable from those produced by the main business cycle shock of Angeletos et al. (2020). This result is robust to controlling for macroeconomic volatility and uncertainty, and alternative macroeconomic shocks. Our findings highlight the importance of higher-order dynamics for business cycle theories. 

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

Keywords: Business cycles, downside risk, skewness

JEL codes: C22, C38, E32



Source: European Stability Mechanism | Working Paper Series | Volume 2022 | No 53 | July 2022 | 44 Pages

Copyright © European Stability Mechanism, 2022 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.