When do ?nancial markets help in predicting economic activity? With incomplete markets, the link between ?nancial and real economy is state- dependent and ?nancial indicators may turn out to be useful particularly in forecasting "tail" macroeconomic events. We examine this conjecture by studying...

In this paper, we provide evidence that fat tails and stochastic volatility can be important in improving in-sample fit and out-of-sample forecasting performance. Specifically, we construct a VAR model where the orthogonalised shocks feature Student’s t distribution and time-varying variance....