ROC approach to forecasting recessions using daily yield spreads

Kajal Lahiri and Cheng Yang ()
Additional contact information
Cheng Yang: Liaoning University

Business Economics, 2022, vol. 57, issue 4, No 6, 203 pages

Abstract: Abstract Even though many studies have established the existence of structural breaks and declining predictability in the relationship between GDP growth and yield spreads, business analysts continue to watch for the inversion of the spread as one of the leading indicators for recessions. We use the Receiving Operating Characteristics (ROC) approach, to reevaluate the enduring power of spread to forecast recessions, notwithstanding the temporal instabilities. We identify the value of the spread that produces the highest discriminatory power as measured by different functionals of the ROC curve e.g., the hit rate, false alarm rate, and the Youden’s index. Based on data starting from January 2, 1962, we find that the optimal threshold has drifted upwards from zero since the early 1980s, and the deteriorating power of yield spread can largely be restored once the optimal cut-off values are used to issue recession forecasts.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1057/s11369-022-00287-y Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:buseco:v:57:y:2022:i:4:d:10.1057_s11369-022-00287-y

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/11369

DOI: 10.1057/s11369-022-00287-y

Access Statistics for this article

Business Economics is currently edited by Charles Steindel

More articles in Business Economics from Palgrave Macmillan, National Association for Business Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().