Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/110795
Authors: 
De Nicolò, Gianni
Lucchetta, Marcella
Year of Publication: 
2015
Series/Report no.: 
CESifo Working Paper 5286
Abstract: 
Reliable early warning signals are essential for timely implementation of macroeconomic and macro-prudential policies. This paper presents an early warning system as a set of multi-period forecasts of indicators of tail real and financial (systemic) risks. Forecasts are obtained from: (a) autoregressive and factor-augmented VARs with linear GARCH volatility (FAVARs), and (b) auto-regressive and factor-augmented Quantile Projections (QPs). We use a large database of monthly U.S. data for the period 1972:1-2014:12 to forecasts our tail risk indicators with each model in pseudo-real time. Our key finding is that forecasts obtained with autoregressive and FAVAR models significantly underestimate tail risks, while forecasts obtained with autoregressive and factor-augmented QPs deliver superior and fairly reliable early warning signals for tail real and financial risks up to a one-year horizon.
Subjects: 
tail risks
density forecasts
factor models
quantile projections
JEL: 
C50
E30
G20
Document Type: 
Working Paper

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