How many times until a coincidence becomes a pattern? The case of yield curve inversions preceding recessions and the magical number 7

Ned Kock and Augustine Tarkom

Communications in Statistics - Theory and Methods, 2024, vol. 53, issue 16, 5785-5792

Abstract: Let us say that a coincidence involving two events, where one seems to predict the other, happens a number of times. How many times until it can be considered not only a coincidence, but a statistically significant pattern? We propose a framework to answer this question. Using the framework, we find that the number of times required is 7. We illustrate the practical application of our framework in the context of a very important phenomenon: When the percentage difference between 10-year and 3-month U.S. Treasury yields falls below zero, a U.S. recession appears to occur within the next 18 months.

Date: 2024
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DOI: 10.1080/03610926.2023.2232908

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