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Forecasting U.S. Recessions with Probit Stepwise Regression Models

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  • John Silvia
  • Sam Bullard
  • Huiwen Lai

Abstract

Yield spreads have been repeatedly used in the literature as the top candidates in predicting future recessions. In this paper, we show that existing model specifications are good but fall short of the performance of more complete models. Applying a probit stepwise regression procedure to a large number of economic indicators, we find models that dramatically outperform those used in the literature. Due to a time series that only began in 1964Q1 and very few historical recessions, any model specification may capture only a few of the economy's many aspects and thus can potentially be biased. Nevertheless, models with better statistical properties should have a better chance to capture the occurrence of recession. Our chosen models are not immune to statistical limitations but should forecast better than the existing models in the literature.Business Economics (2008) 43, 7–18; doi:10.2145/20080101

Suggested Citation

  • John Silvia & Sam Bullard & Huiwen Lai, 2008. "Forecasting U.S. Recessions with Probit Stepwise Regression Models," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 43(1), pages 7-18, January.
    • Handle: RePEc:pal:buseco:v:43:y:2008:i:1:p:7-18
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