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Forecasting U.S. Recessions with a Large Set of Predictors

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  • Fornaro, Paolo

Abstract

In this paper, I use a large set of macroeconomic and financial predictors to forecast U.S. recession periods. I adopt Bayesian methodology with shrinkage in the parameters of the probit model for the binary time series tracking the state of the economy. The in-sample and out-of-sample results show that utilizing a large cross-section of indicators yields superior U.S. recession forecasts in comparison to a number of parsimonious benchmark models. Moreover, data rich models with shrinkage manage to beat the forecasts obtained with the factor-augmented probit model employed in past research

Suggested Citation

  • Fornaro, Paolo, 2015. "Forecasting U.S. Recessions with a Large Set of Predictors," MPRA Paper 62973, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62973
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    References listed on IDEAS

    as
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    6. Zhihong Chen & Azhar Iqbal & Huiwen Lai, 2011. "Forecasting the probability of US recessions: a Probit and dynamic factor modelling approach," Canadian Journal of Economics, Canadian Economics Association, vol. 44(2), pages 651-672, May.
    7. Reichlin, Lucrezia & Giannone, Domenico & De Mol, Christine, 2006. "Forecasting Using a Large Number of Predictors: Is Bayesian Regression a Valid Alternative to Principal Components?," CEPR Discussion Papers 5829, C.E.P.R. Discussion Papers.
    8. Startz, Richard, 2008. "Binomial Autoregressive Moving Average Models With an Application to U.S. Recessions," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 1-8, January.
    9. repec:ulb:ulbeco:2013/13388 is not listed on IDEAS
    10. James H. Stock & Mark W. Watson, 2012. "Generalized Shrinkage Methods for Forecasting Using Many Predictors," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(4), pages 481-493, June.
    11. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
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    15. De Mol, Christine & Giannone, Domenico & Reichlin, Lucrezia, 2008. "Forecasting using a large number of predictors: Is Bayesian shrinkage a valid alternative to principal components?," Journal of Econometrics, Elsevier, vol. 146(2), pages 318-328, October.
    16. Michael J. Dueker, 1997. "Strengthening the case for the yield curve as a predictor of U.S. recessions," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 41-51.
    17. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-162, April.
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    Cited by:

    1. Marius M. Mihai, 2020. "Do credit booms predict US recessions?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(6), pages 887-910, September.
    2. Kevin Moran & Simplice Aime Nono, 2016. "Using Confidence Data to Forecast the Canadian Business Cycle," Cahiers de recherche 1606, Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques.
    3. Knut Lehre Seip & Dan Zhang, 2021. "The Yield Curve as a Leading Indicator: Accuracy and Timing of a Parsimonious Forecasting Model," Forecasting, MDPI, vol. 3(2), pages 1-16, May.
    4. Baris Soybilgen, 2017. "Identifying Us Business Cycle Regimes Using Factor Augmented Neural Network Models," Working Papers 1703, The Center for Financial Studies (CEFIS), Istanbul Bilgi University.
    5. Mönch, Emanuel & Stein, Tobias, 2021. "Equity premium predictability over the business cycle," Discussion Papers 25/2021, Deutsche Bundesbank.
    6. Michael Puglia & Adam Tucker, 2020. "Machine Learning, the Treasury Yield Curve and Recession Forecasting," Finance and Economics Discussion Series 2020-038, Board of Governors of the Federal Reserve System (U.S.).
    7. Harri Pönkä & Markku Stenborg, 2020. "Forecasting the state of the Finnish business cycle," Finnish Economic Papers, Finnish Economic Association, vol. 29(1), pages 81-99, Spring.

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    More about this item

    Keywords

    Bayesian shrinkage; Business Cycles; Probit model; large cross-sections;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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