Forecasting Recessions with Financial Variables and Temporal Dependence

Pyung Kun Chu
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Pyung Kun Chu: Department of Business Administration, Sejong University, Seoul 05006, Korea

Economies, 2021, vol. 9, issue 3, 1-14

Abstract: Extending earlier research on forecasting recessions with financial variables, I examine the importance of additional financial variables and temporal dependence for recession prediction. I show that both additional financial variables, in particular, the Treasury bill spread, default yield spread, stock return volatility, and temporal cubic terms, which account for temporal dependence, independently help to improve not only in-sample, but also out-of-sample recession prediction. I also find that additional financial variables and temporal cubic terms complement each other in enhancing the predictability of recessions, increasing the explanatory power and decreasing prediction error further, compared to their individual performance.

Keywords: recession forecasting; financial variables; temporal dependence (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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