IDEAS home Printed from https://ideas.repec.org/a/spr/jecfin/v49y2025i2d10.1007_s12197-025-09716-y.html
   My bibliography  Save this article

Economic downturn and the yield curve: Evidence from Canada and the US

Author

Listed:
  • Libo Xu

    (Lakehead University)

Abstract

The paper utilized the Sahm rule recession indicator to examine the relationship between the yield curve shape and recession risk. In doing so, we constructed the recession indicator and estimated a latent factor model that allows a rich interdependence between bond yields and the indicator in Canada and the US. The results based on impulse response functions confirm the predictive power of the yield curve’s slope on the future recession. Moreover, the quantitative analysis also shows that a downward shift in the yield curve and a decline in the yield curve’s curvature indicate a higher recession risk in the future. Forecast error variance decompositions highlighted the contribution of the information, which is extracted from the shape of the yield curve, to the variability in the recession risk in the long run.

Suggested Citation

  • Libo Xu, 2025. "Economic downturn and the yield curve: Evidence from Canada and the US," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 49(2), pages 536-567, June.
    • Handle: RePEc:spr:jecfin:v:49:y:2025:i:2:d:10.1007_s12197-025-09716-y
    DOI: 10.1007/s12197-025-09716-y
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s12197-025-09716-y
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s12197-025-09716-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    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:spr:jecfin:v:49:y:2025:i:2:d:10.1007_s12197-025-09716-y. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.