Macroeconomic Tail Risk and Global Shocks in the Euro Area: A Multi-Country Quantile Factor-Augmented VAR Approach

Recent trade policy uncertainty and geopolitical tensions suggest that global shocks not only shift the conditional mean but also amplify downside risks. I employed the quantile factor-augmented VAR to model the transmission of geopolitical risk and trade-policy shocks across euro area economies. Monthly euro area observations from January 2000 to October 2025 enable an assessment of cross-country co-movement and international spillovers among nine euro area economies following global shocks. The integration of quantile-specific latent factors into a dynamic high-dimensional VAR structure captures cross-country dependence and distributional asymmetries. The empirical performance of the QFAVAR model in assessing the effects of global shocks on multi-country and country-level macroeconomic variables is illustrated. Short-term forecasts from QFAVAR outperform those of univariate and multivariate models with stochastic volatility and FAVARs with symmetric Gaussian errors. Generalized impulse response functions are employed to assess the short-term transmission of global shocks across countries and quantiles, with particular attention to lower and upper-tail risks. Quantile-based GIRFs indicate pronounced cross-country heterogeneity and strong asymmetries in the response of macroeconomic variables to global shocks.