Johannes Beutel - Bundesbank

"Tail Risk Neglect: A Reality Check", with Valentin Stockerl

Abstract

We provide the first large-scale survey-based evidence on tail risk beliefs. Individuals assign large probabilities to tail events such as a financial crisis, a new pandemic, a China-Taiwan conflict, a severe energy crisis, or a Cyber attack with systemic consequences, inconsistent with a static form of tail risk neglect. They expect large GDP declines and substantial stock market declines, conditional on these events. However, our evidence supports dynamic tail risk neglect in probabilities, as predicted by diagnostic beliefs. In particular, respondents who are already pessimistic respond more to bad news than optimistic respondents. Similarly, bad news activates respondents to adjust their portfolios, while good news does not. Tail risk beliefs causally affect individuals' inclination to invest into housing, equity, or precious metals. The direction of the effect depends on the type of tail event, hence tail risk is not one-dimensional, and safe haven assets are event-specific. Memory provides a micro-foundation for diagnostic beliefs about tail risks.

Additional information:

  • Speaker: Johannes Beutel
  • Time: Wednesday, 03.07.2024, 12:15 - 13:30
  • Location: Faculty Meetingroom, U 1.040
  • Organizer: Finance Group joint with Macro Group
  • Contact: