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Forecasting recessions: can we do better on MARS?

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  • Peter Sephton

Abstract

A number of recent articles have examined the ability of financial variables to predict recessions. In this article, Peter Sephton extends the literature by considering a non-linear, nonparametric approach to predicting the probability of recession using multivariate adaptive regression splines (MARS). The results suggest that this data-intensive approach to modeling is not a panacea for recession forecasting. Although it does well explaining the data within the sample, its out-of-sample forecasts do not improve upon the benchmark probit specification.

Suggested Citation

  • Peter Sephton, 2001. "Forecasting recessions: can we do better on MARS?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 39-49.
  • Handle: RePEc:fip:fedlrv:y:2001:i:mar:p:39-49:n:v.83no.2
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    References listed on IDEAS

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    1. Bernard, Henri & Gerlach, Stefan, 1998. "Does the Term Structure Predict Recessions? The International Evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(3), pages 195-215, July.
    2. Atta-Mensah, Joseph & Tkacz, Greg, 1998. "Predicting Canadian Recessions Using Financial Variables: A Probit Approach," Staff Working Papers 98-5, Bank of Canada.
    3. Fernandez-Rodriguez, Fernando & Sosvilla-Rivero, Simon & Andrada-Felix, Julian, 1999. "Exchange-rate forecasts with simultaneous nearest-neighbour methods: evidence from the EMS," International Journal of Forecasting, Elsevier, vol. 15(4), pages 383-392, October.
    4. Benjamin M. Friedman & Kenneth N. Kuttner, 1998. "Indicator Properties Of The Paper-Bill Spread: Lessons From Recent Experience," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 34-44, February.
    5. Michael J. Dueker, 1997. "Strengthening the case for the yield curve as a predictor of U.S. recessions," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 41-51.
    6. De Gooijer, Jan G. & Ray, Bonnie K. & Krager, Horst, 1998. "Forecasting exchange rates using TSMARS," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 513-534, June.
    7. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-311, July.
    8. Cao, Liangyue & Soofi, Abdol S., 1999. "Nonlinear deterministic forecasting of daily dollar exchange rates," International Journal of Forecasting, Elsevier, vol. 15(4), pages 421-430, October.
    9. Granger, Clive W J, 1995. "Modelling Nonlinear Relationships between Extended-Memory Variables," Econometrica, Econometric Society, vol. 63(2), pages 265-279, March.
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    Citations

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    Cited by:

    1. Sephton, Peter & Mann, Janelle, 2013. "Further evidence of an Environmental Kuznets Curve in Spain," Energy Economics, Elsevier, vol. 36(C), pages 177-181.
    2. Pedro N. Rodriguez & Arnulfo Rodriguez, 2006. "Understanding and predicting sovereign debt rescheduling: a comparison of the areas under receiver operating characteristic curves," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(7), pages 459-479.
    3. Sergey V. Smirnov & Nikolai V. Kondrashov & Anna V. Petronevich, 2016. "Dating Cyclical Turning Points for Russia: Formal Methods and Informal Choices," HSE Working papers WP BRP 122/EC/2016, National Research University Higher School of Economics.
    4. David Jamieson Bolder & Tiago Rubin, 2007. "Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis," Staff Working Papers 07-14, Bank of Canada.
    5. Peter Sephton, 2005. "Forecasting inflation using the term structure and MARS," Applied Economics Letters, Taylor & Francis Journals, vol. 12(4), pages 199-202.
    6. Sharda, V.N. & Patel, R.M. & Prasher, S.O. & Ojasvi, P.R. & Prakash, Chandra, 2006. "Modeling runoff from middle Himalayan watersheds employing artificial intelligence techniques," Agricultural Water Management, Elsevier, vol. 83(3), pages 233-242, June.
    7. repec:spr:jbuscr:v:13:y:2017:i:1:d:10.1007_s41549-017-0014-9 is not listed on IDEAS
    8. K. Batu Tunay, 2010. "Banking Crises and Early Warning Systems: A Model Suggestion for Turkish Banking Sector," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 4(1), pages 9-46.
    9. repec:eee:appene:v:209:y:2018:i:c:p:79-94 is not listed on IDEAS
    10. Pons Novell, J., 2002. "Ciclo de la economía española y contenido informativo de los tipos de interés," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 20, pages 583-598, Diciembre.
    11. repec:eee:eneeco:v:71:y:2018:i:c:p:273-281 is not listed on IDEAS
    12. David Jamieson Bolder & Yuliya Romanyuk, 2008. "Combining Canadian Interest-Rate Forecasts," Staff Working Papers 08-34, Bank of Canada.

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    Keywords

    Recessions ; Forecasting;

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