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Title: Macroeconomic and financial risks: A tale of volatility Authors:  Molin Zhong - Federal Reserve Board (United States) [presenting]
Chiara Scotti - Board of Governors of the Federal Reserve System (United States)
Dario Caldara - Board of Governors (United States)
Abstract: The joint dynamics of the mean and volatility of financial and macroeconomic variables are modeled through a structural vector autoregression with stochastic volatility (SV-VAR). Co-movements in the means and volatilities can produce time-variation and asymmetries in the conditional distributions of the endogenous variables. We first study the evolution of the linkages between macroeconomic and financial tail risks, and the implications of volatility fluctuations for these risks. We then exploit the structure of the model - together with some identification assumptions - to understand the role of level and volatility shocks through a counterfactual experiment. We find that level shocks generate time-varying risk through endogenous volatility, and volatility shocks drive large movements in macroeconomic and financial risk.