Forecasting the European Credit Cycle Using Macroeconomic Variables

36 Pages Posted: 1 Mar 2011

See all articles by Florian Ielpo

Florian Ielpo

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES); Unigestion

Date Written: March 1, 2011

Abstract

We question the ability of macroeconomic data to predict risk appetite and "flight-to-quality" periods in the European credit market using a model inspired by the Markov Switching (MS) literature. This model allows for a direct mapping of exogenous variables into states probabilities. We find that various survey and transformed hard data have a forecasting power. We show that despite its depth, the 2008-2009 crisis should not be regarded as an unusual episode that would have to be modelled by an additional state. Finally, we show that our model outperforms a pure MS model in terms of forecasting accuracy, thus clearly indicating that economic figures are helpful in forecasting the credit cycle.

Keywords: Credit cycle, Switching regimes, Density forecast

JEL Classification: G17, C53

Suggested Citation

Ielpo, Florian, Forecasting the European Credit Cycle Using Macroeconomic Variables (March 1, 2011). Available at SSRN: https://ssrn.com/abstract=1773364 or http://dx.doi.org/10.2139/ssrn.1773364

Florian Ielpo (Contact Author)

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

Unigestion ( email )

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CP 387
Genève 12, CH 1211
Switzerland

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