Detection of turning points in business cycles

Abstract

Methods for on-line monitoring of business cycles are compared with respect to the ability of early prediction of the next turn by an alarm for a turn in a leading index. Three likelihood based methods for turning point detection are compared in detail by using the theory of statistical surveillance and by simulations. One of the methods is based on a Hidden Markov Model. Another includes a non-parametric estimation procedure. Evaluations are made of several features such as knowledge of shape and parameters of the curve, types and probabilities of transitions and smoothing. Results on the expected delay time to a correct alarm and the predictive value of an alarm are discussed. The three methods are also used to analyze an actual data set of a period of the Swedish industrial production. The relative merits of evaluation of methods by one real data set or by simulations are discussed.