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The Great Moderation Flattens Fat Tails: Disappearing Leptokurtosis

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  • WenShwo Fang

    ()
    (Department of Economics, Feng Chia University)

  • Stephen M. Miller

    ()
    (Department of Economics, University of Nevada, Las Vegas)

  • ChunShen Lee

    ()
    (Department of Economics, Feng Chia University)

Abstract

Recently, Fagiolo et al. (2008) find fat tails in the distribution of economic growth rates after adjusting for outliers, autocorrelation, and heteroskedasticity. This paper employs US quarterly real output growth, showing that this finding of fat tails may reflect the Great Moderation. That is, leptokurtosis disappears after GARCH adjustment once we incorporate the break in the variance equation to account for the Great Moderation.

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File URL: http://web.unlv.edu/projects/RePEc/pdf/0903.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by University of Nevada, Las Vegas , Department of Economics in its series Working Papers with number 0903.

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Length: 9 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:nlv:wpaper:0903

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Keywords: real GDP growth; the Great Moderation; leptokurtosis; GARCH models;

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  1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  2. Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2006. "Are Output Growth-Rate Distributions Fat-Tailed? Some Evidence from OECD Countries," LEM Papers Series 2006/23, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  3. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  5. Hillebrand, Eric, 2005. "Neglecting parameter changes in GARCH models," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 121-138.
  6. Margaret M. McConnell & Gabriel Perez Quiros, 1998. "Output fluctuations in the United States: what has changed since the early 1980s?," Staff Reports 41, Federal Reserve Bank of New York.
  7. Jushan Bai & Pierre Perron, 2003. "Critical values for multiple structural change tests," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 72-78, 06.
  8. Kramer, Walter & Azamo, Baudouin Tameze, 2007. "Structural change and estimated persistence in the GARCH(1,1)-model," Economics Letters, Elsevier, vol. 97(1), pages 17-23, October.
  9. Franses, Philip Hans & Ghijsels, Hendrik, 1999. "Additive outliers, GARCH and forecasting volatility," International Journal of Forecasting, Elsevier, vol. 15(1), pages 1-9, February.
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