Forecasting the Probability of Recessions in South Africa: The Role of Decomposed Term-Spread and Economic Policy Uncertainty

Goodness Aye (), Christina Christou (), Luis Gil-Alana and Rangan Gupta
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Goodness Aye: Department of Economics, University of Pretoria, South Africa
Christina Christou: School of Economics and Management, Open University of Cyprus, Cyprus

No 201680, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper extends the vast literature forecasting the probability of recession by including the different components of the term spread, namely the expectation and the term premium components obtained from a fractional integration approach. We also augment these with the economic policy uncertainty index. We use 10 specifications of the probit prediction model and quarterly data from South Africa covering the period 1990:1 to 2012:1 for analyses. Our out-of-sample results show that the model that incorporates the expectation component of the yield spread in addition to economic policy uncertainty provides the best forecast of recession in South Africa. All three recession periods in our sample were accurately dictated by the prediction models and the best forecast occurred at the four quarters ahead horizon. These results were also robust to the full sample prediction

Keywords: Expected term spread; term premium; economic policy uncertainty; recession; out-of-sample forecast; Probit model (search for similar items in EconPapers)
JEL-codes: C25 E37 E44 E52 E62 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2016-11
New Economics Papers: this item is included in nep-afr, nep-for and nep-mac
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Journal Article: Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty (2019)
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