Forecasting the probability of US recessions: A Probit and dynamic factor modelling approach

Zhihong Chen, Azhar Iqbal, Huiwen Lai

Research output: Journal article publicationJournal articleAcademic researchpeer-review

15 Citations (Scopus)

Abstract

Quantifying the probability of U.S. recessions has become increasingly important since August 2007. In a data-rich environment, this paper is the first to apply a Probit model to common factors extracted from a large set of explanatory variables to model and forecast recession probability. The results show the advantages of the proposed approach over many existing models. Simulated real-time analysis captures all recessions since 1980. The proposed model also detects a significant jump in the next six-month recession probability based on data up to November 2007, one year before the formal declaration of the recent recession by the NBER.
Original languageEnglish
Pages (from-to)651-672
Number of pages22
JournalCanadian Journal of Economics
Volume44
Issue number2
DOIs
Publication statusPublished - 1 May 2011

ASJC Scopus subject areas

  • Economics and Econometrics

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