Forecasting the probability of US recessions: a Probit and dynamic factor modelling approach

Forecasting the probability of US recessions: a Probit and dynamic factor modelling approach

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Article ID: iaor201111957
Volume: 44
Issue: 2
Start Page Number: 651
End Page Number: 672
Publication Date: May 2011
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors: , ,
Keywords: economics, statistics: regression, simulation
Abstract:

Quantifying the probability of U.S. recessions has become increasingly important since August 2007. In a data‐rich environment, this paper is the first to apply a Probit model to common factors extracted from a large set of explanatory variables to model and forecast recession probability. The results show the advantages of the proposed approach over many existing models. Simulated real‐time analysis captures all recessions since 1980. The proposed model also detects a significant jump in the next six‐month recession probability based on data up to November 2007, one year before the formal declaration of the recent recession by the NBER.

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