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Evaluating a Leading Indicator: An Application: the Term Spread

Author

Listed:
  • Herman O. Stekler

    (The George Washington University)

  • Tianyu Ye

    (The George Washington University)

Abstract
This paper analyzes the procedures that have previously been used to evaluate indicators. These methods determine whether the indicator correctly classifies periods when there was (not) a recession. These approaches do not show whether or not an indicator signaled a turn or failed to predict it. This paper then presents a new approach and applies it to the term spread series. The results are mixed because the indicator predicts every recession but also generates a large number of false signals. This result may explain why economists do not always place great weight on this series.

Suggested Citation

  • Herman O. Stekler & Tianyu Ye, 2016. "Evaluating a Leading Indicator: An Application: the Term Spread," Working Papers 2016-004, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    • Handle: RePEc:gwc:wpaper:2016-004
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    File URL: https://www2.gwu.edu/~forcpgm/2016-004.pdf
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    References listed on IDEAS

    as
    1. Raffaella Giacomini & Barbara Rossi, 2006. "How Stable is the Forecasting Performance of the Yield Curve for Output Growth?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 783-795, December.
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    More about this item

    Keywords

    leading series; ROC curve; yield spread puzzle;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

    Statistics

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