Recession prediction using yield curve and stock market liquidity deviation measures in South Korean market

Abstract

This thesis extends the benchmark Estrella and Hardouvelis period spread approach to forecasting recession by including stock market macro liquidity bias factors. We use the probit framework to predict the recession, as defined in the FRED between March of 1995 and March of 2017. We have found that combining yield curve parameters with stock market liquidity deviations significantly improves our ability to predict the onset of the US recession based on both in-sample and out-of-sample testing. We suggest that economic forecasters and those carrying out economic stabilization policies generally benefit by monitoring the depth and liquidity of the stock market as well as the yield curve as well as the deviation from each other.