Nowcasting the State of the Italian Economy: The Role of Financial Markets

61 Pages Posted: 11 Feb 2022

Date Written: February 4, 2022

Abstract

This paper compares several methods for constructing weekly nowcasts of recession probabilities in Italy, with a focus on the most recent period of the Covid-19 pandemic. The common thread of these methods is that they use, in different ways, the information content provided by financial market data. In particular, a battery of probit models are estimated after extracting information from a large dataset of more than 130 financial market variables observed at a weekly frequency. The predictive accuracy of these models is explored in a pseudo out-of-sample forecasting exercise. The results demonstrate that nowcasts derived from probit models estimated on a large set of financial variables are, on average, more accurate than standard probit models estimated on a single financial covariate, such as the slope of the yield curve. The proposed approach performs well even compared with probit models estimated on single time series of real economic activity, such as industrial production, or on composite PMI indicators. Overall, the financial indicators used in this paper can be easily updated as soon as new data become available on a weekly basis, thus providing a reliable real-time dating of the Italian business cycle.

Keywords: financial markets, probit models, factor-augmented probit models, model confidence set, penalized likelihood, forecast evaluation

JEL Classification: C22, C25, C53, E32

Suggested Citation

Ceci, Donato and Silvestrini, Andrea, Nowcasting the State of the Italian Economy: The Role of Financial Markets (February 4, 2022). Bank of Italy Temi di Discussione (Working Paper) No. 1362, Available at SSRN: https://ssrn.com/abstract=4032809 or http://dx.doi.org/10.2139/ssrn.4032809

Donato Ceci

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Silvestrini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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