Forecasting US Recessions: The Role of Sentiment
46 Pages Posted: 22 Feb 2013 Last revised: 15 Sep 2014
Date Written: May 2, 2013
We study the role of sentiment variables as predictors for US recessions. We combine sentiment variables with either classical recession predictors or common factors based on a large panel of macroeconomic and financial variables. Sentiment variables hold vast predictive power for US recessions in excess of both the classical recession predictors and the common factors. The strong importance of the sentiment variables is documented both in-sample and out-of-sample.
Keywords: business cycles, forecasting, factor analysis, probit model, sentiment variables
JEL Classification: C22, C25, E32, E37, G17
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