UHD Economics Professor Develops Revolutionary Recession-Forecasting Model
Rolando Pelaez, UHD professor of finance, is producing cutting-edge research in the field of economics, accomplishing a feat many others have been unable to surmount.
Pelaez has developed three econometric models that use only unrevised data to correctly forecast every recession in the U.S. since the 1970's. His paper in the Southern Economic Journal demonstrates that his quarterly model dominates, in predictive accuracy, the U.S. Leading Economic Index.
"Using data through June 2007, my biannual model predicted that the economy would enter recession in the second half of 2007," Pelaez said. "In contrast, in December 2007, the Federal Reserve was predicting no recession in 2008, and as late as September 2008, professional forecasters were saying the same."
Pelaez's model could help economists predict a downturn and possibly mitigate the social costs of a recession. Moreover, the strategy could prove profitable for investors, aiding them in adjusting their trade activities based on predicted rises and falls.
"Hereto, professional forecasters have been unable to predict recessions reliably," said Pelaez. "This has been the elusive Holy Grail of empirical macroeconomics. Likewise, the vast majority of professional portfolio managers have been unable to outperform the buy-and-hold benchmark."
The paper Pelaez published in The Review of Financial Economics shows that using recessional probability forecasts to switch out of stocks ahead of recessions yields triple the terminal wealth compared to the buy-and-hold strategy.
Within the last six months, Pelaez has published three papers in some of the world's top financial economic publications. In his latest, "A Biannual Recession Forecasting Model," published in the Journal of Macroeconomics, Pelaez develops a model to correctly forecast, over a validation sample of 46 years, whether a recession will occur within the next half-year.
"Dr. Pelaez's work is unprecedented," said Chu Nguyen, chairman of the FAEIS department. "Each of these papers contributes significantly to empirical macroeconomics and empirical finance, and places UHD's name in these internationally recognized journals for the first time ever. It is an incredible achievement for him, for our department and for UHD."
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