Abstract
The VIX index and the spread between long- and short-term Treasury bond yields co-move in counterclockwise cycles that align with the business cycle. Based on this empirical fact, I predict U.S. recessions using an indicator of the economy’s location on the VIX-yield-curve cycle. The proposed indicator significantly outperforms the yield-curve spread in predicting U.S. recessions from 1990–2021 both in- and out- of-sample using both static and dynamic probit models. VIX-yield-curve cycles also contain predictive power above and beyond other leading economic indicators.
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