Forecasting the European Credit Cycle Using Macroeconomic Variables
36 Pages Posted: 1 Mar 2011
Date Written: March 1, 2011
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
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