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A time-varying skewness model for Growth-at-Risk

Working papers
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Download PDF: Working Paper 49


This paper develops a new empirical model to study macro-financial risks and shows that changing financial conditions can signal risks to the path of future economic growth.

Author: Martin Iseringhausen (ESM)



This paper studies macroeconomic risks in a panel of advanced economies based on a stochastic volatility model in which macro-financial conditions shape the predictive growth distribution. We find sizable time variation in the skewness of these distributions, conditional on the macro-financial environment. Tightening financial conditions signal increasing downside risk in the short term, but this link reverses at longer horizons. When forecasting downside risk, the proposed model, on average, outperforms existing approaches based on quantile regression and a GARCH model, especially at short horizons. In forecasting upside risk, it improves the average accuracy across all horizons up to four quarters ahead. The suggested approach can inform policy makers' assessment of macro-financial vulnerabilities by providing a timely signal of shifting risks and a quantification of their magnitude.

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: Bayesian analysis, downside risk, macro-financial linkages, time variation

JEL codes: C11, C23, C53, E44

Source: European Stability Mechanism | Working Paper Series | Volume 2021 | No 49 | June 2021 | 43 Pages

Copyright © European Stability Mechanism, 2021 | 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.