Do Asset Price Drops Foreshadow Recessions?

36 Pages Posted: 28 Oct 2013

See all articles by John C. Bluedorn

John C. Bluedorn

International Monetary Fund (IMF) - Research Department

Jörg Decressin

International Monetary Fund (IMF)

Marco E. Terrones

International Monetary Fund (IMF)

Date Written: October 2013

Abstract

This paper examines the usefulness of asset prices in predicting recessions in the G-7 countries. It finds that asset price drops are significantly associated with the beginning of a recession in these countries. In particular, the marginal effect of an equity/house price drop on the likelihood of a new recession can be substantial. Equity price drops are, however, larger and are more frequent than house price drops, making them on average more helpful as recession predictors. These findings are robust to the inclusion of the term-spread, uncertainty, and oil prices. Lastly, there is no evidence of significant bias resulting from the rarity of recession starts.

Keywords: Asset prices, Group of seven, Stock markets, Business cycles, Economic recession, Economic forecasting, Economic models, Macroeconomic forecasting, Financial markets, Uncertainty, Oil Prices

JEL Classification: E32, E37, G17

Suggested Citation

Bluedorn, John C. and Decressin, Jorg W. and Terrones, Marco E., Do Asset Price Drops Foreshadow Recessions? (October 2013). IMF Working Paper No. 13/203. Available at SSRN: https://ssrn.com/abstract=2346253

John C. Bluedorn (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jorg W. Decressin

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Marco E. Terrones

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4329 (Phone)

HOME PAGE: http://imf.org/external/np/CV/AuthorCV.aspx?AuthID=171

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