Uncertainty, Skewness, and the Business Cycle Through the MIDAS Lens

We employ a mixed‐frequency quantile regression approach to model the time‐varying conditional distribution of the US real GDP growth rate. We show that monthly information on financial conditions improves the predictive power of an otherwise quarterly‐only model. We combine selected quantiles of the estimated conditional distribution to produce novel measures of uncertainty and skewness. Embedding these measures in a VAR framework, we show that unexpected changes in uncertainty are associated with an increase in (left) skewness and a downturn in real activity. Business cycle effects are significantly downplayed if we consider a quarterly‐only quantile regression model. We find the endogenous response of skewness to substantially amplify the recessionary effects of uncertainty shocks. Finally, we construct a monthly frequency version of our uncertainty measure and document the robustness of our findings.