The Probability of Recession: A Critique of a New Forecasting Technique

Institutional Advisory & Solutions

June 2020

While many recession prediction models were sanguine in late 2019, a new forecasting tool, using Mahalanobis distance as a measure of recession probability, did flash red for a short time, but then quickly signaled “all clear.” Prompted by this unexpected sharp increase in recession probability and subsequent, equally sharp reversal, PGIM’s Institutional Advisory & Solutions (IAS) team breaks down the strengths and weaknesses of this new forecasting methodology. In this new research publication, the team also examines the metric’s potential as a market timing tool.

 

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