Board of Governors of the Federal Reserve System

Figure 1. Comparison of scenario variables to their data counterparts

The figure consists of 5 panels labeled a) through e) that are located on one page in one column. Each figure contains two lines – dark (blue) dashed line that corresponds to scenario average trajectory and lighter solid (orange) line that corresponds to the historical data. The x-axis is measured in quarters and ranges from 0 to 13. Y-axis are variable-specific and are described below.

Panel a: Unemployment Rate

The y-axis is measured in percent and ranges from 5 to 10. The figure displays two lines (dashed dark and solid light) that both start from about 5.5 percent and gradually increase to about 10 percent – the peak level that is reached around quarter 6-7 – and then gradually decline to about 7 percent in the final quarter (13). Both lines closely follow each other with only minor temporary deviations.

Panel b: Commercial Real Estate (CRE) Indexed

The y-axis reflects index measurement units and ranges from about 60 to 100. Both lines start at 100 in quarter 0 and then gradually decline. The darker dashed line reaches the minimum (about 60) in quarter 8, whereas the lighter solid line reaches the minimum (also about 60 in quarter 6). The lighter solid line lies somewhat below the dark dashed line in quarters 4-7 and then lies somewhat above it in quarters 8-13. After the minimum, both lines very gradually move up. The dark dashed line reaches about 65 in the last quarter, whereas the lighter solid line reaches about 75.

Panel c: BBB Spread (Basis Points)

The y-axis is measured in basis points and ranges from about 150 to 600. The darker dashed line starts off at slightly below 200 gradually (parabolically) increases reaching a peak of about 600 in quarter 4 and declines in a near-linear fashion from the peak to the end point (slightly above 200). The lighter solid line starts off at about 250, then increases to about 300, rapidly moving to about 600 in quarter 3 and staying at approximately (slightly lower) level in quarter 3. There is a near-linear decline to quarter 5 value of about 250, after which a gradual decline with slight intermittent upper movements follows, ending at the same value as the darker dashed line in quarter 13.

Panel d: U.S. Market Volatility Index (VIX)

The y-axis reflects the index units, ranging from 20 to 80 percent. The darker dashed line rapidly increases in quarter 1 to reach about 65, then minimally increases further in quarter 2 and starts a shallow decline to quarter 3, from there a gradual slightly convex decline trajectory follows, ending at about 20 in quarter 13. The lighter solid line starts off from about the same (slightly lower) level as the darker dashed line and increases steeply to it s peak of about 80 in quarter 2, followed by a decline of comparable speed as the increase until about quarter 5, when the level close to 30 is reached. From there an unstable decline with occasional increases follows, ending at a level of about 25 in quarter 13.

Panel e: Equity Price: Dow Jones Index

The y-axis is measured in index-units and ranges from about 50 to 100 percent. Both lines start off at 100 percent in quarter 0. The darker dashed lines gradually (in a convex way) decreases to its minimum of about 50 in quarter 4, gradually rebounding from there (again, in a parabolic fashion) to reach about 100 in the final quarter. The solid lighter line follows a similar overall trajectory but stays above the dark dashed line throughout the horizon. It reaches the minimum of about 60 in quarter 3, followed by a ‘bumpy’ rebound trajectory ending at a level somewhat above the darker dashed line.

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Figure 2. Impulse Response Functions to the BBB Spread Shock

The figure consists of 5 panels, arranged in two rows, with the first row containing 4 panels and the second row containing the one remaining panel and a legend. All panels display: the median impulse responses (solid line); 16th and 84th percentiles of the posterior distribution (dotted lines) with a darker shaded region between them representing 68 percent of the probability mass; the median impulse responses (solid line); 2.5th and 97.5th percentiles of the posterior distribution (dash-dotted lines) with a lighter shaded region between them representing 95 percent of the probability mass; the average scenario path across severely adverse scenarios from 2014-2025 (dashed line). For the purposes of figure descriptions, the dotted lines, dash-dotted lines, and shaded areas between them are collectively referred to as uncertainty bands, unless specifically noted. The x-axis displays time horizon measured in quarter and ranging from 0 to 13. The y-axes are all measured in percent, except for the BBB spread (panel 3 in row 1) which is measured in percentage points.

Panel 1 in row 1: Unemployment rate

The y axis ranges from 0 to 14. The median response (solid line) in this panel displays a gradual hump-shaped movement starting from about 6 and peaking at about 10 in quarter 5. The end value of the trajectory is above the starting point. The uncertainty bands are tight until quarter 4 and then become somewhat wider throughout. The average scenario line (dashed line) follows a path similar to the median response.

Panel 2 in row 1: CRE

The y axis ranges from -40 to 10. The median response (solid line) in this panel displays a u-shaped decline with a trough reached at about quarter 6-7 and the end value remaining below the starting value at median. Uncertainty bands are initially tight (until about quarter 4) and then become substantially wider and retain the u-shape of the median impulse response. The average scenario line (dashed line) falls more than the median response, reaches a trough value a few quarters later, and recovers less.

Panel 3 in row 1: BBB spread

The y axis ranges from 0 to 7. The median response (solid line) in this panel starts off somewhat below 6, reaching the peak of 6 in the next quarter and then gradually declining to a value between 1 and 2. The bands are rather tight throughout, tighter in the first 3 quarters. The average scenario line starts at a lower point than the median response and then reaches a peak between 5 and 6 a few quarters later and linearly declines to an end value slightly above 2.

Panel 4 in row 1: VIX

The y axis ranges from 0 to 100. The median response (solid line) in this panel starts off at about 80. A gradual decline follows with the end value being close to 30. Uncertainty bands around the median estimate (shaded area) are of approximately similar width throughout and are on the tighter side. The average scenario line (dashed line) starts lower, slightly above 60, and increases modestly before declining over the rest of the horizon and ending slightly below the median response.

Panel 1 in row 2: Equity prices

The y axis ranges from -80 to 40. The median response (solid line) in this panel starts around -50, declining somewhat further to the trough (about -55) in the subsequent quarter. A concave rebound follows. The uncertainty bands are rather wide in this panel, crossing the zero line from below around quarter 5 for the 92.5th/97.5th percentile bands and quarter 9 for the 16th/84th percentile bands. The average scenario line (dashed line) follows a more u-shaped path: it starts around -30, falls to around -50 around the 4th quarter, and then recovers to above -10 by the end of the horizon.

Panel 2 in row 2: Legend

This panel contains a legend indicating that the solid line corresponds to ‘Median’, the dotted lines correspond to ‘16th/84th Percentiles’, the dash-dotted lines correspond to ‘2.5th/97.5th Percentiles’, and the dashed line corresponds to ‘Average Scenario’.

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Figure 3. Smaller Sample Exercise: Impulse Responses to the BBB Shock

The figure consists of 5 panels, arranged in two rows, with the first row containing 4 panels and the second row containing the one remaining panel and a legend. All panels display: the median impulse responses (solid line); 16th and 84th percentiles of the posterior distribution (dotted lines) with a darker shaded region between them representing 68 percent of the probability mass; the median impulse responses (solid line); 2.5th and 97.5th percentiles of the posterior distribution (dash-dotted lines) with a lighter shaded region between them representing 95 percent of the probability mass; the average scenario path across severely adverse scenarios from 2014-2025 (dashed line). For the purposes of figure descriptions, the dotted lines, dash-dotted lines, and shaded areas between them are collectively referred to as uncertainty bands, unless specifically noted. The x-axis displays time horizon measured in quarter and ranging from 0 to 13. The y-axes are all measured in percent, except for the BBB spread (panel 3 in row 1) which is measured in percentage points.

Panel 1 in row 1: Unemployment rate

The y axis ranges from 0 to 12. The median response (solid line) in this panel displays a gradual hump-shaped movement starting from about 6 and peaking below 10 around quarter 6. The end value of the trajectory is above the starting point. The uncertainty bands are tight until quarter 4 and then become somewhat wider throughout. The average scenario line (dashed line) follows a similarly-shaped path to the median response, although it reaches a higher peak closer to 10.

Panel 2 in row 1: CRE

The y axis ranges from -80 to 0. The median response (solid line) in this panel displays a nearly u-shaped decline with a trough reached at about quarter 7-8 and the end value remaining below the starting value. Uncertainty bands are initially tight and then become substantially wider and retain the shape of the median impulse response. The average scenario line (dashed line) follow a path similar to the median response, though it is slightly above the median response until the lines converge at the trough and remain near each other through the rest of the horizon.

Panel 3 in row 1: BBB spread

The y axis ranges from 0 to 7. The median response (solid line) in this panel starts slightly below 6, reaching the peak of 6 in the next quarter and then gradually declining to a value between 1 and 2. The uncertainty bands are rather tight throughout. The average scenario line starts at a lower point than the median response and then reaches a peak between 5 and 6 a few quarters later and linearly declines to an end value slightly above 2.

Panel 4 in row 1: VIX

The y axis ranges from 0 to 100. The median response (solid line) in this panel starts off at about 80. A gradual decline follows with the end value being slightly above 20. Uncertainty bands around the median estimate (shaded area) are of approximately similar width throughout and are on the tighter side. The average scenario line (dashed line) starts lower, slightly above 60, and increases modestly before declining over the rest of the horizon and ending at roughly the same value as the median response.

Panel 1 in row 2: Equity prices

The y axis ranges from -100 to 20. The median response starts slightly below -40, declining persistently to the trough at about -50 around quarter 5. A persistent, gradual rebound follows but the line remains well below 0. The uncertainty bands are rather wide in this panel, particularly at later quarters. The average scenario line (dashed line) follows a more u-shaped path: it starts around -30, falls to around -50 around the 4th quarter, and then recovers to above -10 by the end of the horizon.

Panel 2 in row 2: Legend

This panel contains a legend indicating that the solid line corresponds to ‘Median’, the dotted lines correspond to ‘16th/84th Percentiles’, the dash-dotted lines correspond to ‘2.5th/97.5th Percentiles’, and the dashed line corresponds to ‘Average Scenario’.

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Figure Appendix A. Comparison of BBB Spread Measures

The figure displays two lines: black solid and blue dashed. The x axis measures time in quarters and spans 1990Q1 through 2019 Q4. The y-axis is measured in percent and ranges from 0 to 6. Both lines are highly correlated with each other, displaying only minor deviations. The dynamics over the sample can be described as follows. A local peak close to 2 percent in the early 1990s is followed by a gradual decline with the lowest value of about 0.8 percent reached around 1997. A nearly vertical increase to about 1.8 follows in 1998, a rather horizontal pattern continues until about 2001, when the next hike to slightly above 2 occurs. A zig-zag sideways movement follows until about 2003, when another local peak close to 3 occurs. A rapid decline from this peak reaches its trough in 2005, bottoming out at around 1. A sideways slightly increasing trajectory continues until about 2007-08, when the largest spike on this sample occurs, reaching the level of 6 in 2009. A precipitous fall from this peak follows, with a local minimum around 2 percent persisting throughout 2010 and 2011. In 2013, another sharp increase to a peak of close to 3 occurs. A bumpy decline from this peak leads to a local minimum somewhat above 1 around 2015. A gradual increase culminates in a peak of about 2.5 around 2017, followed by a gradual decline close to 1. A largely sideways (but bumpy) trajectory continues from there on.

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Figure Appendix B. Comparison of the Imputed Volatility Measure against VIX

The figure displays two lines: solid black and blue dashed. The horizontal axis displays time in quarterly increments, and the time ranges from 1990Q1 to 2019 Q4. The figure has two vertical axes to account for scaling differences across the two time series. The left y-axis (for the black line) runs from 10 to 60 and is measured in percent, whereas the right axis (for the dashed blue series) runs from 10 to 90. Across the whole sample period, both lines are very closely correlated with each other (after accounting for scaling differences) and deviate from each other in a rather noisy way.

The overall dynamics of both series can be described as follows. Starting off from a local peak in the 1990s, the series gradually declines in a bumpy fashion to reach a low around 1995. From there, a gradual increase results in a pointy peak around 1997, followed by a rapid decline an another pointy peak in 1998. From there a bumpy zig-zag trajectory continues until about 2004, when another pointy peak is achieved. After 2004, both series display a gradual protracted decline that bottoms out at historically low levels around 2006. This period is followed first by a light increase and then a historically large jump to the global maximum on this sample that occurred in 2008Q3. A precipitous decline from this high value follows in 2010. A bumpy, zig-zag-like overall decline trajectory with occasional upward movements (a significant one occurring in 2013) continues until about 2015, when another small local peak is observed. This peak is followed by a decline and bumpy sideways movement for the remaining quarters of the sample.

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