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Forecasting euro area recessions by combining financial information

Forecasting euro area recessions by combining financial information The last two macroeconomic recessions in the euro area in 2008­2009 and 2011­2013 have pointed out the impact of financial markets on economic activity. In this paper, we propose to evaluate the ability of a set of financial variables to forecast recessions in the euro area by using binary response models associated with information combination. For various forecast horizons, we provide a readable and leading signal of recession by combining information according to two combining schemes. First we average recession probabilities and second we linearly combine variables through a factor model in order to estimate an innovative Factor-Augmented probit model. Out-of-sample results over the periods 2007­2009 and 2011­2013 show that financial variables would have been helpful in giving accurate and timely recession signals in real-time. Keywords: macroeconomic forecasting; recession; financial markets; combining forecasts. Reference to this paper should be made as follows: Bellégo, C. and Ferrara, L. (2017) `Forecasting euro area recessions by combining financial information', Int. J. Computational Economics and Econometrics, Vol. 7, Nos. 1/2, pp.78­94. Biographical notes: Christophe Bellégo is an Economist at Insee, the French National Statistical Office. Previously, he was an Economist in Charge of Public Policy Evaluations at the French Ministry for Industry. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Computational Economics and Econometrics Inderscience Publishers

Forecasting euro area recessions by combining financial information

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Publisher
Inderscience Publishers
Copyright
Copyright © 2017 Inderscience Enterprises Ltd.
ISSN
1757-1170
eISSN
1757-1189
DOI
10.1504/IJCEE.2017.080609
Publisher site
See Article on Publisher Site

Abstract

The last two macroeconomic recessions in the euro area in 2008­2009 and 2011­2013 have pointed out the impact of financial markets on economic activity. In this paper, we propose to evaluate the ability of a set of financial variables to forecast recessions in the euro area by using binary response models associated with information combination. For various forecast horizons, we provide a readable and leading signal of recession by combining information according to two combining schemes. First we average recession probabilities and second we linearly combine variables through a factor model in order to estimate an innovative Factor-Augmented probit model. Out-of-sample results over the periods 2007­2009 and 2011­2013 show that financial variables would have been helpful in giving accurate and timely recession signals in real-time. Keywords: macroeconomic forecasting; recession; financial markets; combining forecasts. Reference to this paper should be made as follows: Bellégo, C. and Ferrara, L. (2017) `Forecasting euro area recessions by combining financial information', Int. J. Computational Economics and Econometrics, Vol. 7, Nos. 1/2, pp.78­94. Biographical notes: Christophe Bellégo is an Economist at Insee, the French National Statistical Office. Previously, he was an Economist in Charge of Public Policy Evaluations at the French Ministry for Industry.

Journal

International Journal of Computational Economics and EconometricsInderscience Publishers

Published: Jan 1, 2017

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