Abstract

http://ssrn.com/abstract=1049081
 
 

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Financial Market Perceptions of Recession Risk


Thomas B. King


Federal Reserve Bank of Chicago

Andrew T. Levin


Federal Reserve Board

Roberto Perli


Federal Reserve Board - Monetary Affairs

October 2007

FEDS Working Paper No. 2007-57

Abstract:     
Over the Great Moderation period in the United States, we find that corporate credit spreads embed crucial information about the one-year-ahead probability of recession, as evidenced by both in-and out-of-sample fit. Furthermore, the incidence of false positive predictions of recession is dramatically reduced by utilizing a bivariate model that includes a measure of credit spreads along with the slope of the yield curve; indeed, these bivariate models provide much better forecasting performance than any combination of univariate models. We also find that optimal (Bayesian) model combination strongly dominates simple averaging of model forecasts in predicting recessions.

Number of Pages in PDF File: 22

Keywords: Recession forecasting, yield curve, term spread, credit spread

JEL Classification: E37, E44

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Date posted: December 4, 2007  

Suggested Citation

King, Thomas B. and Levin, Andrew T. and Perli, Roberto, Financial Market Perceptions of Recession Risk (October 2007). FEDS Working Paper No. 2007-57. Available at SSRN: http://ssrn.com/abstract=1049081 or http://dx.doi.org/10.2139/ssrn.1049081

Contact Information

Thomas B. King
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
Andrew Levin (Contact Author)
Federal Reserve Board ( email )
20th and C Streets, NW
Washington, DC 20551
United States
202-452-3541 (Phone)
202-452-2301 (Fax)
Roberto Perli
Federal Reserve Board - Monetary Affairs ( email )
20th and C Streets, NW
Washington, DC 20551
United States
202-452-2465 (Phone)
202-452-2301 (Fax)
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