Predicting recessions using VIX–yield curve cycles

Anne Lundgaard Hansen

International Journal of Forecasting, 2024, vol. 40, issue 1, 409-422

Abstract: The VIX index and the spread between long- and short-term Treasury bond yields co-move in counterclockwise cycles that align with the business cycle. Based on this empirical fact, I predict U.S. recessions using an indicator of the economy’s location on the VIX–yield curve cycle. The proposed indicator significantly outperforms the yield curve spread in predicting U.S. recessions from 1950–2022 both in- and out-of-sample and using both static and dynamic probit models. VIX–yield curve cycles also contain predictive power above and beyond other leading economic indicators.

Keywords: Recession predictability; Yield curve; VIX; Leading indicators; Probit (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:40:y:2024:i:1:p:409-422

DOI: 10.1016/j.ijforecast.2023.04.002

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