Predicting Simultaneous Severe Recessions Using Yield Spreads as Leading Indicators
27 Pages Posted: 3 Jun 2011 Last revised: 22 Feb 2012
Date Written: May 31, 2011
Severe simultaneous recessions are defined to occur when at least half of the countries under investigation (Australia, Canada, Germany, Japan, United Kingdom, and United States) are in recession simultaneously. I pose two new research questions that extend upon stylized facts for US recessions. One, are the occurrences of simultaneous recessions predictable? Two, does the yield spread predict future occurrences of simultaneous recessions? I use the indicator for severe simultaneous recessions as the explained variable in probit models. The lagged yield spread is an important explanatory variable, where decreasing yield spreads are a leading indicator for severe simultaneous recessions. Both US and German yield spreads act as leading indicator for severe simultaneous recessions.
Keywords: Business Cycle, Recessions, Yield spread, Probit Model
JEL Classification: C25, E32, E43, F44, G15
Suggested Citation: Suggested Citation