Forecasting the probability of US recessions: a Probit and dynamic factor modelling approach

Zhihong Chen, Azhar Iqbal and Huiwen Lai

Canadian Journal of Economics, 2011, vol. 44, issue 2, 651-672

Abstract: Quantifying the probability of U.S. recessions has become increasingly important since August 2007. In a data-rich environment, this paper is the first to apply a Probit model to common factors extracted from a large set of explanatory variables to model and forecast recession probability. The results show the advantages of the proposed approach over many existing models. Simulated real-time analysis captures all recessions since 1980. The proposed model also detects a significant jump in the next six-month recession probability based on data up to November 2007, one year before the formal declaration of the recent recession by the NBER.

JEL-codes: C53 E17 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (25)

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