Recession Prediction Markets and Macroeconomic Risk in Asset Prices

Abstract

This paper analyzes recession prediction markets from Intrade and PredictIt where individuals bet on the binary outcome of a recession occurring by a certain date. Using a time series of such historical recession prediction market data to measure macroeconomic risk in a variety of asset classes, we find a 1% increase in ex-ante recession prediction market probability is associated with a -0.29% decline in U.S. equity markets and a -0.77 basis point decrease in the 10-Year U.S. Treasury yield. Recession prediction markets also explain a significant amount of the variation in credit spreads, the U.S. Treasury yield curve, and U.S. dollar foreign exchange rates but cannot explain the value and momentum anomalies in equity markets as well as the U.S. treasury term premium.