IDEAS home Printed from https://ideas.repec.org/a/jof/jforec/v29y2010i1-2p215-230.html
   My bibliography  Save this article

Dynamic probit models and financial variables in recession forecasting

Author

Listed:
  • Henri Nyberg

    (Department of Economics and HECER, University of Helsinki, Finland)

Abstract

In this paper, various financial variables are examined as predictors of the probability of a recession in the USA and Germany. We propose a new dynamic probit model that outperforms the standard static model, giving accurate out-of-sample forecasts in both countries for the recession period that began in 2001, as well as the beginning of the recession in 2008. In accordance with previous findings, the domestic term spread proves to be an important predictive variable, but stock market returns and the foreign term spread also have predictive power in both countries. In the case of Germany, the interest rate differential between the USA and Germany is also a useful additional predictor. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Henri Nyberg, 2010. "Dynamic probit models and financial variables in recession forecasting," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(1-2), pages 215-230.
  • Handle: RePEc:jof:jforec:v:29:y:2010:i:1-2:p:215-230 DOI: 10.1002/for.1161
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1002/for.1161
    File Function: Link to full text; subscription required
    Download Restriction: no

    References listed on IDEAS

    as
    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. Marcelle Chauvet & Simon Potter, 2005. "Forecasting recessions using the yield curve," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(2), pages 77-103.
    3. Marcellino, Massimiliano & Stock, James H. & Watson, Mark W., 2006. "A comparison of direct and iterated multistep AR methods for forecasting macroeconomic time series," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 499-526.
    4. Michael Dueker, 2005. "Dynamic Forecasts of Qualitative Variables: A Qual VAR Model of U.S. Recessions," Journal of Business & Economic Statistics, American Statistical Association, pages 96-104.
    5. Paap, Richard & Segers, Rene & van Dijk, Dick, 2009. "Do Leading Indicators Lead Peaks More Than Troughs?," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 528-543.
    6. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
    7. Diebold, Francis X & Rudebusch, Glenn D, 1989. "Scoring the Leading Indicators," The Journal of Business, University of Chicago Press, vol. 62(3), pages 369-391, July.
    8. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, pages 788-829.
    9. Startz, Richard, 2008. "Binomial Autoregressive Moving Average Models With an Application to U.S. Recessions," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 1-8, January.
    10. Tina Hviid Rydberg & Neil Shephard, 2003. "Dynamics of Trade-by-Trade Price Movements: Decomposition and Models," Journal of Financial Econometrics, Society for Financial Econometrics, pages 2-25.
    11. Estrella, Arturo, 1998. "A New Measure of Fit for Equations with Dichotomous Dependent Variables," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 198-205, April.
    12. Anna Florio, 2004. "The Asymmetric Effects of Monetary Policy," Journal of Economic Surveys, Wiley Blackwell, vol. 18, pages 409-426, July.
    13. Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 701-714, Nov.-Dec..
    14. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, vol. 115(505), pages 722-744, July.
    15. 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.
    16. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    17. Donald P. Morgan, 1993. "Asymmetric effects of monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 21-33.
    18. Donald W. K. Andrews & Ray C. Fair, 1988. "Inference in Nonlinear Econometric Models with Structural Change," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 615-640.
    19. Michael J. Dueker, 2002. "Regime-dependent recession forecasts and the 2001 recession," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 29-36.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jof:jforec:v:29:y:2010:i:1-2:p:215-230. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/2966 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.