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Time-Varying Evidence of Predictability of Financial Stress in the United States over a Century: The Role of Inequality

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Famagusta, via Mersin 10, Northern Cyprus, Turkey)

  • Edmond Berisha

    (Feliciano School of Business, Montclair State University, Montclair, NJ 07043, USA)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)

  • Christian Pierdzioch

    (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany)

Abstract

In this paper, we analyze time-varying predictability of financial stress due to growth in income inequality of the United States (US) over the annual period of 1913 to 2016. In order to ensure that we remove the asset price effects on income inequality, and provide incorrect inferences regarding the impact on financial stress, we work with capital-gains excluded six alternative measures of top shares of pretax income and wages. We find that the top 10 percent, the top 10 percent to 5 percent, and the top 5 percent to 1 percent inequality growth rates tend to predict financial stress relatively better than the corresponding inequality growth rates associated with the top 1 percent, top 0.1 percent, and the top 0.01 percent of the income distribution. Moreover, all the six metrics of inequality growth is capable of predicting the heightened financial stress observed during the onset of the Great Depression and the same associated with the recent global financial crisis. Finally, our in-sample evidence of predictability tends to carry over to an out-of-sample forecasting exercise under four out of the six measures of inequality considered, and in particular for the broader measures of inequality - a result consistent with our in-sample analysis.

Suggested Citation

  • Mehmet Balcilar & Edmond Berisha & Rangan Gupta & Christian Pierdzioch, 2020. "Time-Varying Evidence of Predictability of Financial Stress in the United States over a Century: The Role of Inequality," Working Papers 202054, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:202054
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    More about this item

    Keywords

    Financial Stress; Inequality; Time-Varying Predictions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G01 - Financial Economics - - General - - - Financial Crises

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