Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279198 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10449
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We have studied the relationship between Receiver Operating Characteristics (ROC) and Precision-Recall Curve (PRC) both analytically and using a real-life empirical example of yield spread as a predictor of recessions. We show that false alarm rate in ROC and inverted precision in PRC are analogous concepts, and their difference is determined by the interaction of sample imbalance and forecast bias. We found that in cases of severe class imbalance, the forecasts need to be adequately biased to mitigate the effect of imbalancedness. The mix of values of precision and recall over six sub-samples show that the predictive power of the spread has not deteriorated in recent decades, provided the optimum values of threshold are used. Using PRC, we quantify the extent to which ROC could be exaggerating the true predictive value of the yield curve in predicting recessions.
Subjects: 
ROC
PRC
recessions
yield spread
rare events forecasting
JEL: 
C18
C22
C25
C53
E17
E37
E47
Document Type: 
Working Paper
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