Forecasting euro area recessions by combining financial information

Christophe Bellégo and Laurent Ferrara

International Journal of Computational Economics and Econometrics, 2017, vol. 7, issue 1/2, 78-94

Abstract: The last two macroeconomic recessions in the euro area in 2008-2009 and 2011-2013 have pointed out the impact of financial markets on economic activity. In this paper, we propose to evaluate the ability of a set of financial variables to forecast recessions in the euro area by using binary response models associated with information combination. For various forecast horizons, we provide a readable and leading signal of recession by combining information according to two combining schemes. First we average recession probabilities and second we linearly combine variables through a factor model in order to estimate an innovative Factor-Augmented probit model. Out-of-sample results over the periods 2007-2009 and 2011-2013 show that financial variables would have been helpful in giving accurate and timely recession signals in real-time.

Keywords: macroeconomic forecasting; recession forecasts; financial markets; euro area recessions; financial information; financial variables. (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijcome:v:7:y:2017:i:1/2:p:78-94

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