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Do Asset Price Drops Foreshadow Recessions?

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Author Info

  • John C Bluedorn
  • Jörg Decressin
  • Marco Terrones

Abstract

This paper examines the usefulness of asset prices in predicting recessions in the G-7 countries. It finds that asset price drops are significantly associated with the beginning of a recession in these countries. In particular, the marginal effect of an equity/house price drop on the likelihood of a new recession can be substantial. Equity price drops are, however, larger and are more frequent than house price drops, making them on average more helpful as recession predictors. These findings are robust to the inclusion of the term-spread, uncertainty, and oil prices. Lastly, there is no evidence of significant bias resulting from the rarity of recession starts.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/203.

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Length: 35
Date of creation: 02 Oct 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/203

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Related research

Keywords: Asset prices; Group of seven; Stock markets; Business cycles; Economic recession; Economic forecasting; Economic models; Macroeconomic forecasting; Financial markets; Uncertainty; Oil Prices;

This paper has been announced in the following NEP Reports:

References

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  1. Kristie M. Engemann & Kevin L. Kliesen & Michael T. Owyang, 2010. "Do oil shocks drive business cycles? some U.S. and international evidence," Working Papers, Federal Reserve Bank of St. Louis 2010-007, Federal Reserve Bank of St. Louis.
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