Forecasting and stress testing with quantile vector …...2019/05/15  · Forecasting and stress...

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Forecasting and stress testing with quantile vector autoregression Frankfurt am Main, 15 May, 2019 Conference on Systemic Risk and the Macroeconomy Sulkhan Chavleishvili Simone Manganelli European Central Bank

Transcript of Forecasting and stress testing with quantile vector …...2019/05/15  · Forecasting and stress...

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Forecasting and stress testing with quantile vector autoregression

Frankfurt am Main, 15 May, 2019Conference on Systemic Risk and the Macroeconomy

Sulkhan ChavleishviliSimone ManganelliEuropean Central Bank

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A dynamic multivariate time series model

Systematic influences of conditioning variables on the conditional distribution of the response

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US Growth at Risk

Source: Adrian et al., AER 2019

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Quantile regressionQuantile VAR – Identification and forecastingGrowth vulnerabilities in Europe

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Outline

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Central bank related applications

CAViaR: Engle and Manganelli, 2004VAR for VaR: White, Kim and Manganelli, 2015CoVaR: Adrian and Brunnermeier, 2016GaR: Growth at Risk (Adrian et al., 2019)IaR: Inflation at Risk (Ghysels et al., 2018)CaR: Capital at Risk

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Ordinary Least Squares – Mean

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Least absolute deviation – Median

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Quantile regression

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Comparison of loss functions

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Quantile regressionQuantile VAR – Identification and forecastingGrowth vulnerabilities in Europe

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Outline

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Structural VAR

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Structural VAR

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Structural VAR

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Structural VAR

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Structural VAR

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Structural quantile VAR

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Structural quantile VAR

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Structural quantile VAR

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Structural quantile VAR

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Forecasting with structural quantile VAR

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Careful with the cross section

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Careful with the cross section

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Careful with the cross section

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Forecasting with VAR

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Forecasting with quantile VAR

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Stress testing with quantile VAR

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Quantile regressionQuantile VAR – Identification and forecastingGrowth vulnerabilities in Europe

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Outline

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Vulnerable growth in Europe

EA IP

CISS

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Data

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Important linkages

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Important linkages

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Euro area Growth at Risk

10% quantile

90% quantile

IP realization

OLS

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Euro area Growth at Risk

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Impulse response function for quantile VAR

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Quantile impulse response function for IPShock to CISS

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Stress testing euro area growth

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EA IP forecast under stress scenario

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EA IP forecast under stress scenario

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Conclusion

Methodological contribution:• Introduced quantile VAR• Showed how to do forecasting with quantile regression• Quantile forecasting <-> Stress testing

Empirical findings:• Strong macro-financial linkages in the euro area• Macro-financial linkages are activated under stress• Standard OLS VAR misses most of the action

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Will the tortoise really win in the end?


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