Predicting recession probabilities with financial variables over multiple horizons
We forecast recession probabilities for the United States, Germany and Japan. The predictions are based on the widely-used probit approach, but the dynamics of regressors are endogenized using a VAR. The combined model is called a ‘ProbVAR’. At any point in time, the ProbVAR allows to generate conditional recession probabilities for any sequence of forecast horizons. At the same time, the ProbVAR is as easy to implement as traditional probit regressions. The slope of the yield curve turns out to be a successful predictor, but forecasts can be markedly improved by adding other financial variables such as the short-term interest rate, stock returns or corporate bond spreads. The forecasting performance is very good for the United States: for the out-of-sample exercise (1995 to 2009), the best ProbVAR specification correctly identifies the ex-post classification of recessions and non-recessions 95% of the time for the one-quarter forecast horizon and 87% of the time for the four-quarter horizon. Moreover, the ProbVAR turns out to significantly improve upon survey forecasts. Relative to the good performance reached for the United States, the ProbVAR forecasts are slightly worse for Germany, but considerably inferior for Japan. JEL Classification: C25, C32, E32, E37
|Date of creation:||Oct 2010|
|Date of revision:|
|Contact details of provider:|| Postal: 60640 Frankfurt am Main, Germany|
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Dueker, 2005.
"Dynamic Forecasts of Qualitative Variables: A Qual VAR Model of U.S. Recessions,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 23, pages 96-104, January.
- Michael J. Dueker, 2003. "Dynamic forecasts of qualitative variables: a Qual VAR model of U.S. recessions," Working Papers 2001-012, Federal Reserve Bank of St. Louis.
- Tom Doan, . "RATS programs to replicate Dueker(2005) JBES dynamic probit model," Statistical Software Components RTZ00049, Boston College Department of Economics.
- D'Agostino, Antonello & Domenico, Giannone & Surico, Paolo, 2006.
"(Un)Predictability and Macroeconomic Stability,"
Research Technical Papers
5/RT/06, Central Bank of Ireland.
- Antonello D'Agostino & Domenico Giannone & Paolo Surico, 2005. "(Un)Predictability and Macroeconomic Stability," Macroeconomics 0510024, EconWPA.
- D'Agostino, Antonello & Giannone, Domenico & Surico, Paolo, 2007. "(Un)Predictability and Macroeconomic Stability," CEPR Discussion Papers 6594, C.E.P.R. Discussion Papers.
- D’Agostino, Antonello & Giannone, Domenico & Surico, Paolo, 2006. "(Un)Predictability and macroeconomic stability," Working Paper Series 0605, European Central Bank.
- Jonas Dovern & Christina Ziegler, 2008.
"Predicting Growth Rates and Recessions. Assessing U.S. Leading Indicators under Real-Time Condition,"
Applied Economics Quarterly (formerly: Konjunkturpolitik),
Duncker & Humblot, Berlin, vol. 54(4), pages 293-318.
- Jonas Dovern & Christina Ziegler, 2008. "Predicting Growth Rates and Recessions. Assessing U.S. Leading Indicators Under Real-Time Conditions," Kiel Working Papers 1397, Kiel Institute for the World Economy.
- Dovern, Jonas & Ziegler, Christina, 2008. "Predicting growth rates and recessions: assessing US leading indicators under real-time conditions," Kiel Working Papers 1397, Kiel Institute for the World Economy (IfW).
- Hideaki Hirata & Kazuo Ueda, 1998.
"The Yield Spread as a Predictor of Japanese Recessions,"
164501, Harvard University OpenScholar.
- Hideaki Hirata & Kazuo Ueda, 1998. "The Yield Spread as a Predictor of Japanese Recessions," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
- 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.
- Engemann, Kristie M. & Kliesen, Kevin L. & Owyang, Michael T., 2011.
"Do Oil Shocks Drive Business Cycles? Some U.S. And International Evidence,"
Cambridge University Press, vol. 15(S3), pages 498-517, November.
- Kristie M. Engemann & Kevin L. Kliesen & Michael T. Owyang, 2010. "Do oil shocks drive business cycles? some U.S. and international evidence," Working Papers 2010-007, Federal Reserve Bank of St. Louis.
- 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.
- Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2000. "How stable is the predictive power of the yield curve? evidence from Germany and the United States," Staff Reports 113, Federal Reserve Bank of New York.
- Marcellino, Massimiliano & Stock, James H & Watson, Mark W, 2005.
"A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series,"
CEPR Discussion Papers
4976, C.E.P.R. Discussion Papers.
- 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.
- Massimiliano Marcellino & James Stock & Mark Watson, 2005. "A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series," Working Papers 285, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- 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 555-76, June.
- Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
- Bellégo, C. & Ferrara, L., 2009. "Forecasting Euro-area recessions using time-varying binary response models for financial," Working papers 259, Banque de France.
- Heikki Kauppi & Pentti Saikkonen, 2008. "Predicting U.S. Recessions with Dynamic Binary Response Models," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 777-791, November.
When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20101255. 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: (Official Publications)
If references are entirely missing, you can add them using this form.