Research Discussion Papers, Bank of Finland
No 14/2001:
Financial market volatility: informative in predicting recessions
Jan Annaert, Marc J.K. De Ceuster and Nico Valckx
Abstract: It is commonly agreed that the term spread and stock
returns are useful in predicting recessions. We extend these empirical
findings by examining interest rate and stock market volatility as
additional recession indicators. Both risk-return analysis and the theory
of investment under uncertainty provide a rationale for this extension. The
results for the United States, Germany and Japan show that interest rate
and stock return volatility contribute significantly to the forecasting of
future recessions. This holds in particular for short term predictions.
Keywords: business cycles; stock market volatility; interest rate volatility; probit model; (follow links to similar papers)
JEL-Codes: C25; E32; E44; (follow links to similar papers)
25 pages, August 8, 2001
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