Recession Prediction Using Yield Curve and Stock Market Liquidity Deviation Measures

The Review of Finance, Volume 19, Number 1, March 2015

21 Pages Posted: 18 Apr 2013 Last revised: 18 Dec 2016

See all articles by Oral Erdogan

Oral Erdogan

Piri Reis University

Paul B. Bennett

Fordham University Business School

Cenktan Ozyildirim

Istanbul Bilgi University

Date Written: November 11, 2013

Abstract

This paper extends the benchmark Estrella and Hardouvelis (1991) term spread approach to recession forecasting by including the stock market macro liquidity deviation factor. We use a probit framework to predict US business cycles, as defined by the NBER between 1959Q1 and 2011Q4. We find that combining the yield curve parameter with the stock market liquidity deviation significantly improves our ability to predict the onset of a US recession, based both on in-sample and out-of-sample tests. In addition, changes in stock market depth further increase the accuracy of the model. Our findings suggest that economic forecasters and those charged with conducting economic stabilization policy more generally would benefit from monitoring not only the yield curve but also stock market depth and liquidity, and their deviation from one another.

Keywords: Yield curve, macro liquidity deviation, stock market depth, recession, probit model

JEL Classification: G01, G15, E43, E44

Suggested Citation

Erdogan, Oral and Bennett, Paul B. and Ozyildirim, Cenktan, Recession Prediction Using Yield Curve and Stock Market Liquidity Deviation Measures (November 11, 2013). The Review of Finance, Volume 19, Number 1, March 2015. Available at SSRN: https://ssrn.com/abstract=2253180 or http://dx.doi.org/10.2139/ssrn.2253180

Oral Erdogan (Contact Author)

Piri Reis University ( email )

Postane Mahallesi
Tuzla
Istanbul, 34940
Turkey

Paul B. Bennett

Fordham University Business School ( email )

1790 Broadway
New York
New York, NY 10019
United States
917 434 0226 (Phone)

HOME PAGE: http://business.fordham.edu/faculty/bennett

Cenktan Ozyildirim

Istanbul Bilgi University ( email )

Eski Silahtarağa Elektrik Santralı
Silahtarağa Mah. Kazım Karabekir Cad. No: 1 Eyüp
Istanbul, 34060
Turkey

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