Haroon Mumtaz , Queen Mary University of London Konstantinos Theodoridis , Bank of England
August 13, 2015
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We use a factor model with stochastic volatility to decompose the time-varying variance of Macro economic and Financial variables into contributions from country-specific uncertainty and uncertainty common to all countries. We find that the common component plays an important role in driving the time-varying volatility of nominal and financial variables. The cross-country co-movement in volatility of real and financial variables has increased over time with the common component becoming more important over the last decade. Simulations from a two-country DSGE model featuring Epstein Zin preferences suggest that increased globalisation and trade openness may be the driving force behind the increased cross-country correlation in volatility.
J.E.L classification codes: C15,C32, E32
Keywords:FAVAR, Stochastic Volatility, Uncertainty Shocks, DSGE Model