IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v143y2022ics0014292122000101.html
   My bibliography  Save this article

Financial conditions and macroeconomic downside risks in the euro area

Author

Listed:
  • Lhuissier, Stéphane

Abstract

Motivated by empirically characterizing the relationship between financial conditions and downside macroeconomic risks in the euro area, I develop a regime-switching skew-normal model with time-varying probabilities of transitions. Using Bayesian methods, the model estimates show that a strong cyclical pattern emerges from the conditional skewness, which has a tendency to rapidly decline to negative territory prior and during recessions. However, the inclusion of financial-specific information in time-varying probabilities does not help to anticipate such skewness nor more generally to provide advance warnings of tail risks.

Suggested Citation

  • Lhuissier, Stéphane, 2022. "Financial conditions and macroeconomic downside risks in the euro area," European Economic Review, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:eecrev:v:143:y:2022:i:c:s0014292122000101
    DOI: 10.1016/j.euroecorev.2022.104046
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292122000101
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.euroecorev.2022.104046?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Giacomini, Raffaella & Komunjer, Ivana, 2005. "Evaluation and Combination of Conditional Quantile Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 416-431, October.
    2. Markus K. Brunnermeier & Yuliy Sannikov, 2014. "A Macroeconomic Model with a Financial Sector," American Economic Review, American Economic Association, vol. 104(2), pages 379-421, February.
    3. Bruno Feunou & Roméo Tédongap, 2012. "A Stochastic Volatility Model With Conditional Skewness," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(4), pages 576-591, July.
    4. Raffaella Giacomini & Halbert White, 2006. "Tests of Conditional Predictive Ability," Econometrica, Econometric Society, vol. 74(6), pages 1545-1578, November.
    5. Zhigu He & Arvind Krishnamurthy, 2012. "A Model of Capital and Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 735-777.
    6. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York.
    7. Christoffersen, Peter & Heston, Steve & Jacobs, Kris, 2006. "Option valuation with conditional skewness," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 253-284.
    8. Lhuissier, Stéphane & Zabelina, Margarita, 2015. "On the stability of Calvo-style price-setting behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 77-95.
    9. Timmermann, Allan, 2000. "Moments of Markov switching models," Journal of Econometrics, Elsevier, vol. 96(1), pages 75-111, May.
    10. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-1084, September.
    11. Lhuissier, Stéphane, 2017. "Financial intermediaries’ instability and euro area macroeconomic dynamics," European Economic Review, Elsevier, vol. 98(C), pages 49-72.
    12. Francois Gourio, 2012. "Disaster Risk and Business Cycles," American Economic Review, American Economic Association, vol. 102(6), pages 2734-2766, October.
    13. Iseringhausen, Martin, 2020. "The time-varying asymmetry of exchange rate returns: A stochastic volatility – stochastic skewness model," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 275-292.
    14. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2015. "Measuring Uncertainty," American Economic Review, American Economic Association, vol. 105(3), pages 1177-1216, March.
    15. Perez-Quiros, Gabriel & Timmermann, Allan, 2001. "Business cycle asymmetries in stock returns: Evidence from higher order moments and conditional densities," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 259-306, July.
    16. Ferrara, Laurent & Mogliani, Matteo & Sahuc, Jean-Guillaume, 2022. "High-frequency monitoring of growth at risk," International Journal of Forecasting, Elsevier, vol. 38(2), pages 582-595.
    17. Stéphane Lhuissier & Fabien Tripier, 2021. "Regime‐dependent effects of uncertainty shocks: A structural interpretation," Quantitative Economics, Econometric Society, vol. 12(4), pages 1139-1170, November.
    18. Matteo Maggiori, 2017. "Financial Intermediation, International Risk Sharing, and Reserve Currencies," American Economic Review, American Economic Association, vol. 107(10), pages 3038-3071, October.
    19. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-641, June.
    20. Figueres, Juan Manuel & Jarociński, Marek, 2020. "Vulnerable growth in the euro area: Measuring the financial conditions," Economics Letters, Elsevier, vol. 191(C).
    21. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    22. Lhuissier, Stéphane, 2018. "The Regime-Switching Volatility Of Euro Area Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 22(2), pages 426-469, March.
    23. Sims, Christopher A. & Waggoner, Daniel F. & Zha, Tao, 2008. "Methods for inference in large multiple-equation Markov-switching models," Journal of Econometrics, Elsevier, vol. 146(2), pages 255-274, October.
    24. Rossi, Barbara & Sekhposyan, Tatevik, 2019. "Alternative tests for correct specification of conditional predictive densities," Journal of Econometrics, Elsevier, vol. 208(2), pages 638-657.
    25. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    26. Nakajima Jouchi, 2013. "Stochastic volatility model with regime-switching skewness in heavy-tailed errors for exchange rate returns," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(5), pages 499-520, December.
    27. Kremer, Manfred & Lo Duca, Marco & Holló, Dániel, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
    28. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
    29. Albert, James H & Chib, Siddhartha, 1993. "Bayes Inference via Gibbs Sampling of Autoregressive Time Series Subject to Markov Mean and Variance Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 1-15, January.
    30. Markus Brunnermeier & Darius Palia & Karthik A. Sastry & Christopher A. Sims, 2021. "Feedbacks: Financial Markets and Economic Activity," American Economic Review, American Economic Association, vol. 111(6), pages 1845-1879, June.
    31. Harvey, Campbell R. & Siddique, Akhtar, 1999. "Autoregressive Conditional Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(4), pages 465-487, December.
    32. Hubrich, Kirstin & Tetlow, Robert J., 2015. "Financial stress and economic dynamics: The transmission of crises," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 100-115.
    33. repec:ecb:ecbwps:20111426 is not listed on IDEAS
    34. Davide Delle Monache & Andrea De Polis & Ivan Petrella, 2024. "Modeling and Forecasting Macroeconomic Downside Risk," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 42(3), pages 1010-1025, July.
    35. Tobias Adrian & Federico Grinberg & Nellie Liang & Sheheryar Malik & Jie Yu, 2022. "The Term Structure of Growth-at-Risk," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 283-323, July.
    36. Reinaldo B. Arellano‐Valle & Adelchi Azzalini, 2006. "On the Unification of Families of Skew‐normal Distributions," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 33(3), pages 561-574, September.
    37. Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-264, March.
    38. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    39. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    40. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(2), pages 645-700.
    41. Robert J. Barro & José F. Ursúa, 2012. "Rare Macroeconomic Disasters," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 83-109, July.
    42. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2011. "Sources of macroeconomic fluctuations: A regime‐switching DSGE approach," Quantitative Economics, Econometric Society, vol. 2(2), pages 251-301, July.
    43. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York, revised 01 Feb 2015.
    44. Filardo, Andrew J. & Gordon, Stephen F., 1998. "Business cycle durations," Journal of Econometrics, Elsevier, vol. 85(1), pages 99-123, July.
    45. Mark Gertler & Simon Gilchrist, 2018. "What Happened: Financial Factors in the Great Recession," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 3-30, Summer.
    46. Chang, Yoosoon & Choi, Yongok & Park, Joon Y., 2017. "A new approach to model regime switching," Journal of Econometrics, Elsevier, vol. 196(1), pages 127-143.
    47. Kim, Chang-Jin & Piger, Jeremy & Startz, Richard, 2008. "Estimation of Markov regime-switching regression models with endogenous switching," Journal of Econometrics, Elsevier, vol. 143(2), pages 263-273, April.
    48. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    49. Tobias Adrian & Nina Boyarchenko & Domenico Giannone, 2019. "Vulnerable Growth," American Economic Review, American Economic Association, vol. 109(4), pages 1263-1289, April.
    50. Z. I. Botev, 2017. "The normal law under linear restrictions: simulation and estimation via minimax tilting," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 79(1), pages 125-148, January.
    51. Jondeau, Eric & Rockinger, Michael, 2003. "Conditional volatility, skewness, and kurtosis: existence, persistence, and comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1699-1737, August.
    52. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
    53. Antonio Canale & Euloge Clovis Kenne Pagui & Bruno Scarpa, 2016. "Bayesian modeling of university first-year students' grades after placement test," Journal of Applied Statistics, Taylor & Francis Journals, vol. 43(16), pages 3015-3029, December.
    54. Tobias Fissler & Johanna F. Ziegel & Tilmann Gneiting, 2015. "Expected Shortfall is jointly elicitable with Value at Risk - Implications for backtesting," Papers 1507.00244, arXiv.org, revised Jul 2015.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eric Vansteenberghe, 2024. "Distinguishing Strong from Weak Signals in Economic Forecasts," Papers 2411.05938, arXiv.org.
    2. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2024. "Capturing Macro‐Economic Tail Risks with Bayesian Vector Autoregressions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(5), pages 1099-1127, August.
    3. Stéphane Lhuissier & Aymeric Ortmans & Fabien Tripier, 2024. "The Risk of Inflation Dispersion in the Euro Area," Working papers 954, Banque de France.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stéphane Lhuissier, 2019. "Bayesian Inference for Markov-switching Skewed Autoregressive Models," Working papers 726, Banque de France.
    2. Tobias Adrian & Nina Boyarchenko & Domenico Giannone, 2019. "Vulnerable Growth," American Economic Review, American Economic Association, vol. 109(4), pages 1263-1289, April.
    3. Wang, Bo & Li, Haoran, 2021. "Downside risk, financial conditions and systemic risk in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    4. Lhuissier, Stéphane, 2017. "Financial intermediaries’ instability and euro area macroeconomic dynamics," European Economic Review, Elsevier, vol. 98(C), pages 49-72.
    5. Simon Lloyd & Ed Manuel & Konstantin Panchev, 2024. "Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(1), pages 335-392, March.
    6. Ferrara, Laurent & Mogliani, Matteo & Sahuc, Jean-Guillaume, 2022. "High-frequency monitoring of growth at risk," International Journal of Forecasting, Elsevier, vol. 38(2), pages 582-595.
    7. Andrea Silvestrini & Andrea Zaghini, 2015. "Financial shocks and the real economy in a nonlinear world: a survey of the theoretical and empirical literature," Questioni di Economia e Finanza (Occasional Papers) 255, Bank of Italy, Economic Research and International Relations Area.
    8. Kirstin Hubrich & Daniel F. Waggoner, 2022. "The Transmission of Financial Shocks and Leverage of Financial Institutions: An Endogenous Regime-Switching Framework," FRB Atlanta Working Paper 2022-5, Federal Reserve Bank of Atlanta.
    9. Iseringhausen, Martin, 2024. "A time-varying skewness model for Growth-at-Risk," International Journal of Forecasting, Elsevier, vol. 40(1), pages 229-246.
    10. Tobias Adrian & Nina Boyarchenko & Domenico Giannone, 2021. "Multimodality In Macrofinancial Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(2), pages 861-886, May.
    11. Atkeson, Andrew G. & Eisfeldt, Andrea L. & Weill, Pierre-Olivier, 2017. "Measuring the financial soundness of U.S. firms, 1926–2012," Research in Economics, Elsevier, vol. 71(3), pages 613-635.
    12. Hamilton, J.D., 2016. "Macroeconomic Regimes and Regime Shifts," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 163-201, Elsevier.
    13. Tobias Adrian & Nellie Liang, 2018. "Monetary Policy, Financial Conditions, and Financial Stability," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 73-131, January.
    14. Todd E. Clark & Florian Huber & Gary Koop & Massimiliano Marcellino & Michael Pfarrhofer, 2023. "Tail Forecasting With Multivariate Bayesian Additive Regression Trees," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 979-1022, August.
    15. Adams, Patrick A. & Adrian, Tobias & Boyarchenko, Nina & Giannone, Domenico, 2021. "Forecasting macroeconomic risks," International Journal of Forecasting, Elsevier, vol. 37(3), pages 1173-1191.
    16. Piergiorgio Alessandri & Haroon Mumtaz, 2017. "Financial conditions and density forecasts for US output and inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 66-78, March.
    17. Fève, Patrick & Sanchez, Pablo Garcia & Moura, Alban & Pierrard, Olivier, 2021. "Costly default and skewed business cycles," European Economic Review, Elsevier, vol. 132(C).
    18. Vadim Elenev & Tim Landvoigt & Stijn Van Nieuwerburgh, 2021. "A Macroeconomic Model With Financially Constrained Producers and Intermediaries," Econometrica, Econometric Society, vol. 89(3), pages 1361-1418, May.
    19. Borovicka, J. & Hansen, L.P., 2016. "Term Structure of Uncertainty in the Macroeconomy," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1641-1696, Elsevier.
    20. Hartmann, Philipp & Hubrich, Kirstin & Kremer, Manfred & Tetlow, Robert J., 2013. "Melting down: Systemic financial instability and the macroeconomy," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80487, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Financial conditions; Downside risks; Predictability; Regime-switching models;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:143:y:2022:i:c:s0014292122000101. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.