August 2021

Macroeconomic and Financial Risks: A Tale of Mean and Volatility

Dario Caldara, Chiara Scotti, and Molin Zhong

Abstract:

We study the joint conditional distribution of GDP growth and corporate credit spreads using a stochastic volatility VAR. Our estimates display significant cyclical co-movement in uncertainty (the volatility implied by the conditional distributions), and risk (the probability of tail events) between the two variables. We also find that the interaction between two shocks--a main business cycle shock as in Angeletos et al. (2020) and a main financial shock--is crucial to account for the variation in uncertainty and risk, especially around crises. Our results highlight the importance of using multivariate nonlinear models to understand the determinants of uncertainty and risk.

Keywords: Uncertainty, tail risk, joint conditional distributions, main shocks.

DOI: https://doi.org/10.17016/IFDP.2021.1326

PDF: Full Paper

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Last Update: August 19, 2021