Forecasting US recessions with macro factors

Sebastian Fossati

Applied Economics, 2015, vol. 47, issue 53, 5726-5738

Abstract: Dynamic factors estimated from panels of macroeconomic indicators are used to predict future recessions using probit models. Three factors are considered: a bond and exchange rates factor, a stock market factor and a real activity factor. Three results emerge. First, models that use only financial indicators exhibit a large deterioration in fit after 2005. Second, models that use factors yield better fit than models that use indicators directly. Out-of-sample forecasting exercises confirm these results for 3-, 6- and 12-month horizons using both ex-post revised data and real-time data. Third, results show evidence that data revisions affect factors less than individual indicators.

Date: 2015
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Working Paper: Forecasting U.S. Recessions with Macro Factors (2013)
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DOI: 10.1080/00036846.2015.1058904

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