Economic policy uncertainty, financial markets and probability of US recessions

By Lilia Karnizova, Jiaxiong Li. 2014

226 citations recorded by the source corpus.

We use probit recession forecasting models to assess the ability of economic policy uncertainty indexes developed by Baker et al. (2013) to predict future US recessions. The model specifications include policy indexes on their own, and in combination with financial variables, such as interest rate spreads, stock returns and stock market volatility. Both in-sample and out-of-sample analysis suggests that the policy uncertainty indexes are statistically and economically significant in forecasting recessions at the horizons beyond five quarters. The index based on newspaper reports emerges as the best predictor, outperforming the term spread at the longer forecast horizons.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/0e2f58d76ee73e2eade570b9def40d5a656fb1e9

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In Economics and Econometrics

1. Rangan Gupta
2. M. Wohar
3. Clement Kyei
4. M. Balcılar
5. C. Işık
6. E. Sirakaya-Turk
7. Christoffer Koch
8. M. Bordo

Citations in the corpus

• US Economic Policy Uncertainty and Co-Movements between Chinese and US Stock Markets (2017, unknown): “…and McAleer’s (2015) review only covers the papers published in one journal, similar important contributions have also appeared in other journals, including Karnizova and Li (2014), Antonakakis et al.. (2013), Jones and Olson (2013), Colombo (2013), Klößner and Sekkel (2014), and Li et al.. (2015).”
• Economic policy uncertainty and the credit channel: aggregate and bank level U.S. evidence over several decades (2016, background): “And at the macro-level, Karnizova and Li (2014) find that economic policy uncertainty helps predict recessions in the presence of now-standard financial variables.”
• Testing the efficacy of the economic policy uncertainty index on tourism demand in USMCA: Theory and evidence (2020, methodology): “The EPU index is widely used to reveal the impacts of uncertainties on some economic and macroeconomic variables such as stock market returns (Antonakakis et al., 2013; Brogaard and Detzel, 2015; Karnizova and Li, 2014), unemployment (Colombo, 2013; Mumtaz and Surico, 2016), housing prices (Aye, 201”
• Does Economic Policy Uncertainty Predict Exchange Rate Returns and Volatility? Evidence from a Nonparametric Causality-in-Quantiles Test (2015, background): “Naturally, the literature on predictability of exchange rate returns and volatility is voluminous to say the least, with detailed literature review provided by Rossi and Sekhposyan (2015) and Pilbeam and Langeland (2015).”