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Discussion Paper
Vulnerable Growth
Traditional GDP forecasts potentially present an overly optimistic (or pessimistic) view of the state of the economy: by focusing on the point estimate for the conditional mean of growth, such forecasts ignore risks around the central forecast. Yet, policymakers around the world increasingly focus on risks to the central forecast in policy debates. For example, in the United States the Federal Open Market Committee (FOMC) commonly discusses the balance of risks in the economy, with the relative prominence of this discussion fluctuating with the state of the economy. In a recent paper, we ...
Working Paper
Nowcasting Tail Risks to Economic Activity with Many Indicators
This paper focuses on tail risk nowcasts of economic activity, measured by GDP growth, with a potentially wide array of monthly and weekly information. We consider different models (Bayesian mixed frequency regressions with stochastic volatility, classical and Bayesian quantile regressions, quantile MIDAS regressions) and also different methods for data reduction (either the combination of forecasts from smaller models or forecasts from models that incorporate data reduction). The results show that classical and MIDAS quantile regressions perform very well in-sample but not out-of-sample, ...
Working Paper
Nowcasting Tail Risks to Economic Activity with Many Indicators
This paper focuses on nowcasts of tail risk to GDP growth, with a potentially wide array of monthly and weekly information. We consider different models (Bayesian mixed frequency regressions with stochastic volatility, as well as classical and Bayesian quantile regressions) and also different methods for data reduction (either forecasts from models that incorporate data reduction or the combination of forecasts from smaller models). Our results show that, within some limits, more information helps the accuracy of nowcasts of tail risk to GDP growth. Accuracy typically improves as time moves ...
Working Paper
Decomposing Outcome Differences between HBCU and Non-HBCU Institutions
This paper investigates differences in outcomes between historically black colleges and universities (HBCU) and traditional college and universities (non-HBCUs) using a standard Oaxaca/Blinder decomposition. This method decomposes differences in observed educational and labor market outcomes between HBCU and non-HBCU students into differences in characteristics (both student and institutional) and differences in how those characteristics translate into differential outcomes. Efforts to control for differences in unobservables between the two types of students are undertaken through ...
Report
Bank Capital and Real GDP Growth
We find evidence that bank capital matters for the distribution of future GDP growth but not its central tendency. Growth in the aggregate bank capital ratio compresses the tails of expected GDP growth, a relationship that is particularly robust in reducing the probability of the worst GDP outcomes. These results suggest a role for regulation to mitigate financial crises, with an additional 100 basis points of bank capital reducing the probability of negative GDP growth by 10 percent at the one-year horizon, even controlling for credit growth and financial conditions, and without a ...
Report
Forecasting Macroeconomic Risks
We construct risks around consensus forecasts of real GDP growth, unemployment, and inflation. We find that risks are time-varying, asymmetric, and partly predictable. Tight financial conditions forecast downside growth risk, upside unemployment risk, and increased uncertainty around the inflation forecast. Growth vulnerability arises as the conditional mean and conditional variance of GDP growth are negatively correlated: downside risks are driven by lower mean and higher variance when financial conditions tighten. Similarly, employment vulnerability arises as the conditional mean and ...
Report
Flighty liquidity
We study how the risks to future liquidity flow across corporate bond, Treasury, and stock markets. We document distribution ?flight-to-safety? effects: a deterioration in the liquidity of high-yield corporate bonds forecasts an increase in the average liquidity of Treasury securities and a decrease in uncertainty about the liquidity of investment-grade corporate bonds. While the liquidity of Treasury securities both affects and is affected by the liquidity in the other two markets, corporate bond and equity market liquidity appear to be largely divorced from each other. Finally, we show that ...
Report
Vulnerable growth
We study the conditional distribution of GDP growth as a function of economic and financial conditions. Deteriorating financial conditions are associated with an increase in the conditional volatility and a decline in the conditional mean of GDP growth, leading the lower quantiles of GDP growth to vary with financial conditions and the upper quantiles to be stable over time: Upside risks to GDP growth are low in most periods while downside risks increase as financial conditions become tighter. We argue that amplification mechanisms in the financial sector generate the observed growth ...
Working Paper
Hedging and Pricing in Imperfect Markets under Non-Convexity
This paper proposes a robust approach to hedging and pricing in the presence of market imperfections such as market incompleteness and frictions. The generality of this framework allows us to conduct an in-depth theoretical analysis of hedging strategies for a wide family of risk measures and pricing rules, which are possibly non-convex. The practical implications of our proposed theoretical approach are illustrated with an application on hedging economic risk.
Working Paper
Nowcasting Tail Risks to Economic Activity with Many Indicators
This paper focuses on nowcasts of tail risk to GDP growth, with a potentially wide array of monthly and weekly information. We consider different models (Bayesian mixed frequency regressions with stochastic volatility, classical and Bayesian quantile regressions, quantile MIDAS regressions) and also different methods for data reduction (either forecasts from models that incorporate data reduction or the combination of forecasts from smaller models). Our results show that, within some limits, more information helps the accuracy of nowcasts of tail risk to GDP growth. Accuracy typically ...