Do Asset Price Drops Foreshadow Recessions?

Author/Editor:

John C Bluedorn ; Jörg Decressin ; Marco Terrones

Publication Date:

October 2, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the usefulness of asset prices in predicting recessions in the G-7 countries. It finds that asset price drops are significantly associated with the beginning of a recession in these countries. In particular, the marginal effect of an equity/house price drop on the likelihood of a new recession can be substantial. Equity price drops are, however, larger and are more frequent than house price drops, making them on average more helpful as recession predictors. These findings are robust to the inclusion of the term-spread, uncertainty, and oil prices. Lastly, there is no evidence of significant bias resulting from the rarity of recession starts.

Series:

Working Paper No. 2013/203

Subject:

Asset prices Financial institutions Financial markets Housing prices Oil prices Prices Stock markets Stocks

English

Publication Date:

October 2, 2013

ISBN/ISSN:

9781484353363/1018-5941

Stock No:

WPIEA2013203

Pages:

35

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