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.
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Keywords: Business cycles, downside risk, skewness
JEL codes: C22, C38, E32