Capturing Macro‐Economic Tail Risks with Bayesian Vector Autoregressions

Many studies using quantile regressions (QRs) have found that downside risk to output growth varies more than upside risk. We show that Bayesian vector autoregressions (BVARs) with stochastic volatility are able to capture tail risks in forecast distributions. Even though the one‐step‐ahead conditional predictive distributions from the conventional stochastic volatility specification are symmetric, forecasts of downside risks to output growth are more variable than upside risks, and the reverse applies in the case of inflation and unemployment. Overall, BVAR models perform comparably to QR for estimating and forecasting tail risks, complementing BVARs' established performance for forecasting and structural analysis.