Forecasting recessions using the yield curve

Abstract

We compare forecasts of recessions using four different specifications of the probit model: a time invariant conditionally independent version; a business cycle specific conditionally independent model; a time invariant probit with autocorrelated errors; and a business cycle specific probit with autocorrelated errors.The more sophisticated versions of the model take into account some of the potential underlying causes of the documented predictive instability of the yield curve. We find strong evidence in favor of the more sophisticated specification, which allows for multiple breakpoints across business cycles and autocorrelation. We also develop a new approach to the construction of real time forecasting of recession probabilities.

Yield spread as a leading indicator of Tunisian industrial production

“…It can range in value between 0 and 1, with a value close to 1 indicating a good fit. In this kind of model it is no more likely to yield a R2 close to 1 15 . To avoid this problem we use the measure of fit proposed by Estrella (1998).…”

“…Since the forecast horizons are overlapped, the prediction errors are in general autocorrelated. Thus, we correct this problem using the Newey-West (1987) 15 See, for example, Estrella , A.…”

Multi-Market Direction-of-Change Modeling Using Dependence Ratios

“…Of course, the normal CDF ( ) may be used in place of the logistic function ( ), in which case we have the MGARP model, the last letter standing for "probit". Logit speci…cations can be found in the literature stressing …-nancial applications (e.g., Foresi and Peracchi, 1995;Rydberg and Shephard, 2003;Christo¤ersen and Diebold, 2006;Anatolyev and Gospodinov, 2009), while probit is more favored in macroeconomic applications (e.g., Chauvet and Potter, 2005;Dueker, 2005;Kauppi and Saikkonen, 2008) as well as in microeconomic empirical examples (e.g., Mosconi and Seri, 2006). The assumption of the logistic distribution (4) as well as the dynamic equation (5) are testable; see, for example, a review in Gouriéroux (2000).…”

“…Such models are widely used to primarily predict economy's expansions and recessions (e.g., Birchenhall, Jessen, Osborn, and Simpson, 1999;Dueker, 2005;Chauvet and Potter, 2005;Startz, 2008). While it is straightforward to carry these ideas over to modeling the directions-of-change in …nancial markets, it is often interesting, however, to analyze several markets simultaneously.…”

Composite Leading Indicators for Ukraine: An Early Warning Model

“…Most recent econometric works used dynamic probit models (Duecker, 1997;Valcks et al, 2002;Moneta, 2003;Chauvet and Potter, 2005;Kauppi and Saikkonen, 2007;and Nyberg, 2008). The key difference between a dynamic and a static probit model is that the former includes, among other indicators, lagged values of the dependent variable as an explanatory variable (and potentially a leading 37 indicator).…”