Do yield curve inversions predict recessions in the euro area?

David Sabes and Jean-Guillaume Sahuc

Finance Research Letters, 2023, vol. 52, issue C

Abstract: Based on monthly data from 1970 to 2022 and the AUROC performance metric, we show that yield curve inversions generally predict recessions in the euro area. However, there are two important limitations. First, the forecasting capability of the yield curve has tended to weaken since the global financial crisis. Second, the overall performance is driven by eurozone core countries, especially Germany. Risk premia, and more particularly the credit risk component, blur the relationship between the yield curve slope and the probability of a future recession within the so-called periphery countries.

Keywords: Recessions; Yield curve; AUROC; Euro area; Risk premia (search for similar items in EconPapers)
JEL-codes: C25 E37 E43 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Do yield curve inversions predict recessions in the euro area? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322005931

DOI: 10.1016/j.frl.2022.103416

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