Measuring Macroeconomic Tail Risk
72 Pages Posted: 2 May 2016 Last revised: 19 Oct 2020
Date Written: October 13, 2020
This paper proposes a predictive approach to estimate macroeconomic tail risk dynamics over the long run (1876-2015). Our approach circumvents the scarcity of large macroeconomic crises by using observable predictive variables in a large international panel. This method does not require to use asset price information, which allows us to evaluate the empirical validity of rare disasters models. Our macro risk estimates covary with asset prices and forecasts future stock returns, in line with the prediction that macroeconomic tail risk drives the equity premium. A rare disaster model, calibrated from macroeconomic data alone, further supports this interpretation.
Keywords: Rare disasters, equity premium, return predictability
JEL Classification: E44, G12, G17
Suggested Citation: Suggested Citation