It is commonly agreed that the term spread and stock returns are useful in predicting recessions. We extend these empirical findings by examining interest rate and stock market volatility as additional recession indicators. Both risk-return analysis and the theory of investment under uncertainty provide a rationale for this extension. The results for the United States, Germany and Japan show that interest rate and stock return volatility contribute significantly to the forecasting of future recessions. This holds in particular for short term predictions.
Number of Pages in PDF File: 25
Keywords: business cycles, stock market volatility, interest rate volatility, probit model
Annaert, Jan and de Ceuster, Marc J. K. and Valckx, Nico, Financial Market Volatility: Informative In Predicting Recessions
(August 8, 2001). Bank of Finland Discussion Paper No. 14/2001. Available at SSRN: http://ssrn.com/abstract=317921 or http://dx.doi.org/10.2139/ssrn.317921
Jan Annaert (Contact Author)
University of Antwerp Department of Accounting & Finance ( email )
Faculty of Applied Economics Prinsstraat 13 Antwerp, B-2000 Belgium