Indexfundfan\’s blog (new URL is Indextown.com)

April 7, 2006

The yield curve and predicting recessions

Filed under: Finance — indexfundfan @ 11:33 am


Interesting paper by Jonathan Wright that studies the use of the slope of the Treasury yield curve as a leading economic indicator, with inversion of the curve being thought of as a harbinger of a recession. He considers a number of probit models using the yield curve to forecast recessions. The paper concludes that

Consistent with recent work by Ang, Piazzesi, and Wei (2005) on forecasting growth, I have found that there is more information in the shape of the yield curve about the likely odds of a recession than that provided by the term spread alone. Probit models forecasting recessions that use both the level of the federal funds rate and the term spread give better in-sample fit, and better out-of-sample predictive performance, than models with the term spread alone.

Link HERE.

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