Is Financial Market Volatility Informative to Predict Recessions?

It is commonly agreed that the term spread and stock returns are useful in predicting recessions. We investigate whether interest rate and stock market volatility play an additional role as recession indicators. Both risk-return analysis and the theory of investment under uncertainty provide a rationale for this extension. The results show that interest rate and stock return volatility do not contribute systematically to the forecasting of recessions in the US using the NBER definition, but do so, to some extent, when using the OECD dating. In Germany and Japan, using a variety of volatility indicators, the evidence is slightly more favourable