Bond Yield Spread and Recession Prediction Using Econometrics, Machine Learning, and Neural Networks

Bond yield is the return investors receive on bonds, with longer-term bonds generally offering higher yields due to increased risks. The yield spread, particularly between 2-year and 10-year government bonds, serves as an important indicator of economic conditions. A negative yield spread, or inversion, is often seen as a signal of an impending recession.

Existing research has highlighted the relationship between the yield spread and recessions, showing that inversions frequently precede economic slowdowns. However, the predictive power of the yield spread may vary across countries and economic contexts.

This study analyzes historical bond yield data and recession indicators from multiple countries, including India, the US, China, and several European nations. Various methods, including logistic regression, Random Forest, and neural networks, are employed to examine the relationship between the yield spread and recession forecasts.

Comparative analysis of the yield spread's predictive power across different economies will help assess its reliability. The results aim to offer insights into how the yield spread can serve as a recession predictor, providing valuable guidance for policymakers and investors.

The study recognizes potential limitations, including the exclusion of certain macroeconomic factors and the potential influence of market sentiment on bond yields.