Tinbergen Seminar – Which factors drive downside risk in the U.S.Economy?

We study which common factors drive downside risk across a large panel of U.S. macroeconomic variables. We consider a broad set of candidate predictors, comprising both observed factors constructed from macroeconomic, financial, and text data, as well as unobserved factors associated with the panel. The relevance of the factors is assessed by how much they improve out-of-sample downside risk prediction accuracy. Factors are mapped into forecasts via quantile regression and location-scale regression. Results point to a single factor associated with macroeconomic volatility, most closely proxied by the macroeconomic uncertainty index.