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Modelling and Forecasting Macroeconomic Risk with Time Varying Skewness Stochastic Volatility Models

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  • Andrea Renzetti

Abstract

Monitoring downside risk and upside risk to the key macroeconomic indicators is critical for effective policymaking aimed at maintaining economic stability. In this paper I propose a parametric framework for modelling and forecasting macroeconomic risk based on stochastic volatility models with Skew-Normal and Skew-t shocks featuring time varying skewness. Exploiting a mixture stochastic representation of the Skew-Normal and Skew-t random variables, in the paper I develop efficient posterior simulation samplers for Bayesian estimation of both univariate and VAR models of this type. In an application, I use the models to predict downside risk to GDP growth in the US and I show that these models represent a competitive alternative to semi-parametric approaches such as quantile regression. Finally, estimating a medium scale VAR on US data I show that time varying skewness is a relevant feature of macroeconomic and financial shocks.

Suggested Citation

  • Andrea Renzetti, 2023. "Modelling and Forecasting Macroeconomic Risk with Time Varying Skewness Stochastic Volatility Models," Papers 2306.09287, arXiv.org, revised Nov 2023.
    • Handle: RePEc:arx:papers:2306.09287
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    References listed on IDEAS

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    1. Karlsson, Sune & Mazur, Stepan & Nguyen, Hoang, 2023. "Vector autoregression models with skewness and heavy tails," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
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    7. 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.
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    Cited by:

    1. Bruno E. Holtz & Ricardo S. Ehlers & Adriano K. Suzuki & Francisco Louzada, 2025. "Dynamic Skewness in Stochastic Volatility Models: A Penalized Prior Approach," Papers 2508.10778, arXiv.org.
    2. Botelho, Vasco & Foroni, Claudia & Renzetti, Andrea, 2024. "Labour at risk," European Economic Review, Elsevier, vol. 170(C).
    3. Botelho, Vasco & Foroni, Claudia & Renzetti, Andrea, 2023. "Labour at risk," Working Paper Series 2840, European Central Bank.

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