Recent macroeconomic evolutions during the years 2008 and 2009 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 a non-linear binary response model associated with information combination. Especially, we focus on a time-varying probit model whose parameters evolve according to a Markov chain. For various forecast horizons, we provide a readable and leading signal of recession by combining information according to two combining schemes over the sample 1970-2006. First we average recession probabilities and second we linearly combine variables through a dynamic factor model in order to estimate an innovative factor-augmented probit model. Out-of-sample results over the period 2007-2008 show that financial variables would have been helpful in predicting a recession signal as September 2007, that is around six months before the effective start of the 2008-2009 recession in the euro area.
Christophe Bellégo and Laurent Ferrara
Classification JEL : C53, E32, E44.
Keywords : Macroeconomic forecasting, Business cycles, Turning points, Financial markets, Non-linear time series, Combining forecasts.
Updated on: 06/12/2018 11:00