Predicting cyclics turning points with leading index in a Markov switching model

The U.S. Commerce Department’s Composite Index of Leading Indicators as a predictor of business cycle turning points using the two-state Markov switching model as the filter has been evaluated. It was found that, contrary to some recent studies, the predictive performance of CLI is quite good and, with an exception of the 1973:11 peak, it made very little difference to the prediction of turning points whether real-time data are used instead of the revised series. However, imposing any degree of autoregression in the errors on the simple regime-shift model caused the filter to signal turning points inappropriately. Also, no evidence of duration dependence in post-war U.S. business cycles was found.