Forecasting the Probability of US Recessions: A Probit and Dynamic Factor Modelling Approach

22 Pages Posted: 5 May 2011

See all articles by Zhihong Chen

Zhihong Chen

University of International Business and Economics (UIBE) - School of International Trade and Economics

Azhar Iqbal

Wells Fargo Securities, LLC.

Huiwen Lai

Hong Kong Polytechnic University

Date Written: May 2011

Abstract

Quantifying the probability of U.S. recessions has become increasingly important since August 2007. In a data-rich environment, this paper is the first to apply a Probit model to common factors extracted from a large set of explanatory variables to model and forecast recession probability. The results show the advantages of the proposed approach over many existing models. Simulated real-time analysis captures all recessions since 1980. The proposed model also detects a significant jump in the next six-month recession probability based on data up to November 2007, one year before the formal declaration of the recent recession by the NBER.

Quantifier la probabilit des rcessions amricaines est devenu de plus en plus important depuis aot 2007. Dans un environnement o linformation foisonne, ce texte est le premier appliquer la technique probit des facteurs communs extraits dun vaste ensemble de variables explicatives pour modliser et prdire la probabilit de rcession. Les rsultats montrent les avantages de lapproche utilise sur plusieurs des modles en vogue. Une analyse de simulation en temps rel saisit toutes les rcessions depuis 1980. Le modle propos dtecte aussi un saut significatif dans la probabilit de rcession dans les prochains six mois partir des donnes disponibles jusqu novembre 2007 un an avant que le NBER nannonce formellement le commencement de la rcente rcession.

JEL Classification: C53, E17

Suggested Citation

Chen, Zhihong and Iqbal, Azhar and Lai, Huiwen, Forecasting the Probability of US Recessions: A Probit and Dynamic Factor Modelling Approach (May 2011). Canadian Journal of Economics/Revue canadienne d'conomique, Vol. 44, Issue 2, pp. 651-672, 2011, Available at SSRN: https://ssrn.com/abstract=1832156 or http://dx.doi.org/10.1111/j.1540-5982.2011.01648.x

Zhihong Chen (Contact Author)

University of International Business and Economics (UIBE) - School of International Trade and Economics ( email )

10 East Huixin Street
Chaouang District
Beijing, 100029
China

Azhar Iqbal

Wells Fargo Securities, LLC. ( email )

United States

Huiwen Lai

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

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