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Evaluating a leading indicator: an application—the term spread

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  • Herman O. Stekler

    (George Washington University)

  • Tianyu Ye

    (George Washington University)

Abstract

This paper analyzes the procedures that have previously been used to evaluate indicators. These methods determine whether the indicator correctly classifies periods when there was (not) a recession. These approaches do not show whether or not an indicator signaled a turn or failed to predict it. This paper then presents a new approach and applies it to the term spread series. The results are mixed because the indicator predicts every recession but also generates a large number of false signals. This result may explain why economists do not always place great weight on this series.

Suggested Citation

  • Herman O. Stekler & Tianyu Ye, 2017. "Evaluating a leading indicator: an application—the term spread," Empirical Economics, Springer, vol. 53(1), pages 183-194, August.
    • Handle: RePEc:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-016-1200-7
    DOI: 10.1007/s00181-016-1200-7
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    More about this item

    Keywords

    Leading series; ROC curve; Precision–Recall curve; Yield spread puzzle;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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