Why is growth at risk?: the role of financial conditions in a dynamic factor approach

Bini, Lapo; Mueck, Daniel

Why is growth at risk?: the role of financial conditions in a dynamic factor approach

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Citació

Bini, L, Mueck, D. Why is growth at risk?: the role of financial conditions in a dynamic factor approach. 2021. handle: http://hdl.handle.net/10230/49159

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Resum

In order to analyse whether financial conditions are relevant downside risk predictors for the 5% Growth at Risk conditional quantile, we propose a Dynamic Factor- GARCH Model, comparing it to the two most relevant approaches in the literature. We conduct an out-of sample forecasting analysis on the whole sample, as well as focusing on a period of increased European integration after the 2000s. Always, including the national financial conditions index, term structure and housing prices for 17 European countries and the United States, as down side risk predictors. We find evidence of significant predicting power of financial conditions, which, if exploited correctly, becomes more relevant in times of extraordinary financial distress.