Board of Governors of the Federal Reserve System

October 06, 2016

Updating the Recession Risk and the Excess Bond Premium

Giovanni Favara, Simon Gilchrist, Kurt F. Lewis, and Egon Zakrajšek

In our recent FEDS Note, Recession Risk and the Excess Bond Premium (April 8, 2016), we used the excess bond premium (EBP), a financial indicator introduced by Gilchrist and Zakrajšek (2012), to predict the probability that the U.S. economy will enter a recession sometime during the next 12 months. The EBP is a component of corporate bond credit spreads that is not directly attributable to expected default risk and, as argued by Gilchrist and Zakrajšek (2012), provides an effective measure of investor sentiment or risk appetite in the corporate bond market. (See the section titled The Excess Bond Premium in the April Note for more details.)

Beginning with the publication of this Note, we will provide updated estimates of the EBP and the associated model-implied probability of a U.S. recession every month. In general, we will endeavor to have the updated series posted sometime after 10:00 a.m. on the fourth business day of each month. Because the EBP is a staff research product and not an official statistical release, it is subject to delay, revision, or methodological changes without advance notice. ¹

Although we will not write a new FEDS Note each month, the latest estimate of the EBP and of the model-implied probability of a U.S recession will be posted as a comma-separated values (CSV) file at the permanent URL https://www.federalreserve.gov/econres/notes/feds-notes/ebp_csv.csv*. As of this publication, monthly data are available for the period from January 1973 to September 2016.

Going forward, users of the EBP data should take note that the entire history of the EBP may revise each month. Two sources contribute to such revisions. First, firms revise their historical balance sheet data. Also, in order to provide monthly updates when balance sheet data are available only quarterly, we hold the firms' balance sheet data constant while updating the associated bond and equity prices, resulting in revisions to the EBP once the balance sheet data for the most recent months becomes available after the close of the quarter.

The second source of revision is inherent to small changes in the panel of bonds used in the model. The EBP is estimated using secondary market prices of senior unsecured bonds issued by a large representative sample of U.S. non-financial firms. Thus, when the sample of bonds changes (due to retirement, refinancing, or new issuance), the bond-level data need to be re-matched to firms' balance sheet data, which causes changes in the composition of the underlying sample. In practice, however, these revisions tend to be modest and concentrated in the most-recent months of the sample.

References
Gilchrist, Simon, and Egon Zakrajšek. 2012. "Credit Spreads and Business Cycle Fluctuations." American Economic Review 102 (4): 1692-1720.

* Due to a technical issue, the file posted on July 6, 2018, contained missing values from October 2017 through March 2018. The updated version, posted on July 12, 2018, contains the corrected series.

1. On the rare occasion when source data are unavailable or delayed, the updated EBP will be posted as soon as feasible. Additionally, in situations when the scheduled release falls during the FOMC communications blackout period (PDF), the updated EBP will be posted after the blackout period has ended. Return to text