Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233247 
Authors: 
Year of Publication: 
2008
Series/Report no.: 
Discussion paper No. 31
Publisher: 
Aboa Centre for Economics (ACE), Turku
Abstract: 
Recent research provides controversial evidence on the stability of yield-curve based binary probit models for forecasting U.S. recessions. This paper reviews so far applied specifications and presents new procedures for examining the stability of selected probit models. It finds that a yield-curve based probit model that treats the binary response (a recession dummy) as a nonhomogeneous Markov chain produces superior in-sample and out-of-sample probability forecasts for U.S. recessions and that this model specification is stable over time. Thus, the failure of yieldcurve based forecasts to signal the 1990-1991 and 2001 recessions should not be attributed to parameter instability, instead the evidence suggests that these events were inherently uncertain.
Subjects: 
recession forecast
yield curve
dynamic probit models
parameter stability
JEL: 
C22
C25
E32
E37
Document Type: 
Working Paper

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