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Yield-Curve Based Probit Models for Forecasting U.S. Recessions: Stability and Dynamics

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  • Heikki Kauppi

    ()
    (Department of Economics, University of Turku)

Abstract

Recent research provides controversial evidence on the stability of yield-curve based binary probit models for forecasting U.S. recessions. This paper reviews so far applied specifications and presents new procedures for examining the stability of selected probit models. It finds that a yield-curve based probit model that treats the binary response (a recession dummy) as a nonhomogeneous Markov chain produces superior in-sample and out-of-sample probability forecasts for U.S. recessions and that this model specification is stable over time. Thus, the failure of yieldcurve based forecasts to signal the 1990-1991 and 2001 recessions should not be attributed to parameter instability, instead the evidence suggests that these events were inherently uncertain.

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Bibliographic Info

Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 31.

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Length: 41
Date of creation: May 2008
Date of revision:
Handle: RePEc:tkk:dpaper:dp31

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Keywords: recession forecast; yield curve; dynamic probit models; parameter stability;

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References

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Cited by:
  1. Henri Nyberg, 2010. "Testing an autoregressive structure in binary time series models," Economics Bulletin, AccessEcon, vol. 30(2), pages 1460-1473.
  2. Ng, Eric C.Y., 2012. "Forecasting US recessions with various risk factors and dynamic probit models," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 112-125.
  3. Ratcliff, Ryan, 2013. "The “probability of recession”: Evaluating probabilistic and non-probabilistic forecasts from probit models of U.S. recessions," Economics Letters, Elsevier, vol. 121(2), pages 311-315.

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