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Predicting Canadian Recessions Using Financial Variables: A Probit Approach

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  • Atta-Mensah, Joseph
  • Tkacz, Greg

Abstract

This paper examines the ability of a number of financial variables to predict Canadian recessions. Regarding methodology, we follow closely the technique employed by Estrella and Mishkin (1998), who use a probit model to predict U.S. recessions up to eight quarters in advance. Our main finding is that the spread between the yield on Canadian long bonds and the 90-day commercial paper rate is particularly useful in predicting Canadian recessions. This result is consistent with those of Estrella and Mishkin (1998).

Suggested Citation

  • Atta-Mensah, Joseph & Tkacz, Greg, 1998. "Predicting Canadian Recessions Using Financial Variables: A Probit Approach," Staff Working Papers 98-5, Bank of Canada.
  • Handle: RePEc:bca:bocawp:98-5
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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. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Staff Working Papers 97-10, Bank of Canada.
    3. 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.
    4. Geoffrey H. Moore, 1961. "Leading and Confirming Indicators of General Business Changes," NBER Chapters,in: Business Cycle Indicators, Volume 1, pages 45-109 National Bureau of Economic Research, Inc.
    5. Barry Cozier & Greg Tkacz, "undated". "The Term Structure and Real Activity in Canada," Staff Working Papers 94-3, Bank of Canada.
    6. Jeffrey A. Frankel & Cara S. Lown, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve Along Its Entire Length," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 517-530.
    7. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
    8. W. A. Beckett, 1961. "Indicators of Cyclical Recessions and Revivals in Canada," NBER Chapters,in: Business Cycle Indicators, Volume 1, pages 294-324 National Bureau of Economic Research, Inc.
    9. Tiff Macklem & Alain Paquet & Louis Phaneuf, 1996. "Asymmetric Effects of Monetary Policy: Evidence from the Yield Curve," Cahiers de recherche CREFE / CREFE Working Papers 42, CREFE, Université du Québec à Montréal.
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    Citations

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    Cited by:

    1. Hamilton, James D & Kim, Dong Heon, 2002. "A Reexamination of the Predictability of Economic Activity Using the Yield Spread," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 340-360, May.
    2. Viktor Kotlan, 2002. "Monetary Policy and the Term Spread in a Macro Model of a Small Open Economy," Working Papers 2002/01, Czech National Bank, Research Department.
    3. Sylvain Martel, 2005. "Y a-t-il eu surinvestissement au Canada durant la seconde moitié des années 1990?," Staff Working Papers 05-5, Bank of Canada.
    4. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, University Library of Munich, Germany.
    5. Mili, Mehdi & Sahut, Jean-Michel & Teulon, Frédéric, 2012. "Non linear and asymmetric linkages between real growth in the Euro area and global financial market conditions: New evidence," Economic Modelling, Elsevier, vol. 29(3), pages 734-741.
    6. Souki, Kaouthar, 2008. "Assessing the effects of U.S. shocks on the Canadian economy using alternative identification methods," The North American Journal of Economics and Finance, Elsevier, vol. 19(2), pages 193-213, August.
    7. Javier Gómez, 2007. "Changes in the Informational Content of the Spread: Is Monetary Policy Becoming Less Effective?," Faculty Working Papers 05/07, School of Economics and Business Administration, University of Navarra.
    8. Peter Sephton, 2001. "Forecasting recessions: can we do better on MARS?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 39-49.
    9. Esther Fernández Galar & Javier Gómez Biscarri, 2003. "Revisiting the Ability of Interest Rate Spreads to Predict Recessions: Evidence for a," Faculty Working Papers 04/03, School of Economics and Business Administration, University of Navarra.
    10. Jean-michel Sahut & Medhi Mili & Frédéric Teulon, 2012. "What is the linkage between real growth in the Euro area and global financial market conditions?," Economics Bulletin, AccessEcon, vol. 32(3), pages 2464-2480.
    11. Switzer, Lorne N., 2010. "The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 332-346, December.
    12. Milda Maria Burzala, 2012. "The Probability of Recession in Poland Based on the Hamilton Switching Model and the Logit Model," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 12, pages 73-88.
    13. 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.
    14. Melvin muzi Khomo & Meshach jesse Aziakpono, 2007. "Forecasting Recession In South Africa: A Comparison Of The Yield Curve And Other Economic Indicators," South African Journal of Economics, Economic Society of South Africa, vol. 75(2), pages 194-212, June.
    15. Patrick De lamirande & Jason Stevens, 2016. "Predicting events with an unidentified time horizon," Economics Bulletin, AccessEcon, vol. 36(2), pages 729-735.
    16. Viktor Kotlán, 2000. "The Term Structure of Interest Rates and Future Inflation," Macroeconomics 0004014, University Library of Munich, Germany.
    17. Döpke, Jörg, 1999. "Predicting Germany's recessions with leading indicators: Evidence from probit models," Kiel Working Papers 944, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    Business fluctuations and cycles; Interest rates;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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