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This work was conducted during a difficult time for me, my country, and my people. After long three months of struggle it seemed as though democracy and fairness has finally prevailed. For a moment everyone saw a glimpse of hope. Within days, however, it was unjustly stripped away when foreign government troops invaded Ukrainian territory. Brother was set to fight against brother, after all we were supposed to be close neighbors, friends, colleagues, family. I would like to thank the people of Ukraine for giving me hope that our country may and can have a better future; That we, as people, can be an example to others; That truth and justice will always prevail. I have not spent a second writing this dissertation without thinking of you deeply in my heart.


Scope of an ability to forecasting macroeconomic activity puzzled economist, investors, and policymakers for decades. Each party has their own motives and agenda. Despite the individual purpose, all seek to understand on both theoretical and practical level what forecasts economic activity and how it can be influenced. Economists for a considerable amount of time resorted to sophisticated and complex mathematical models in order to forecast the future economic activity. Kessel (1965) offered a far more basic indicator such as the term-structure of interest rates that can be incredibly useful in predicting a country’s output. More recent research additionally supports a claim that simple financial indicators, such as interest rates are better at predicting economic recessions than composite indices of leading indicators (Estrella and Mishkin, 1995).

Building on the previous research, this dissertation focuses on defining the in-sample relation...

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...forecasting model indicates a near zero probability of a recession, then the Federal Reserve may find this reassuring and proceed to tighten its monetary policy. (Bamara, 2006)

For investment managers, forecasting economic activity is fundamental for several reasons. Financial market participants are forward looking, and as a result security prices embody expectations of future economic activity (Dotsey 1998). Economic forecasts influence growth and earnings prospects which influence security valuation. Economic conditions also impact government and corporate debt financing requirements and correspondingly, terms available on the market for issuance and investment. Therefore, a bond fund manager would certainly want to know if a recession is imminent.

Bond Theories
∆GDP=(∆Yt+j) (1)

∆Yt+j =

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