Financial Market Perceptions of Recession Risk

22 Pages Posted: 4 Dec 2007

See all articles by Thomas B. King

Thomas B. King

Federal Reserve Bank of Chicago

Andrew T. Levin

affiliation not provided to SSRN

Roberto Perli

Board of Governors of the Federal Reserve System

Date Written: October 2007

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.

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

JEL Classification: E37, E44

Suggested Citation

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

Thomas B. King

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Andrew Levin (Contact Author)

affiliation not provided to SSRN

Roberto Perli

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2465 (Phone)
202-452-2301 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
281
Abstract Views
1,510
rank
134,103
PlumX Metrics