A Reexamination of the Predictability of Economic Activity Using the Yield Spread

Hamilton, James D.; Kim, Dong Heon

doi:10.1353/mcb.2002.0040

Cited by 302 publications

(194 citation statements)

References 38 publications

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“…Its weak form postulates the equality between current longerterm rates and the average expected overnight rate plus a constant maturity specific risk premium, see e.g. Litterman et al (1991) and Hamilton and Kim (2002). 3 In a first-difference representation of the respective longer-term interest rate, R, of maturity k, the relationship can be written as:…”

Section: Money Market Rates Monetary Transmission and The Expectatimentioning

confidence: 99%

The effectiveness of monetary policy in steering money market rates during the financial crisis

Abbassi

Linzert

2012

Journal of Macroeconomics

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Section: Money Market Rates Monetary Transmission and The Expectatimentioning

confidence: 99%

The effectiveness of monetary policy in steering money market rates during the financial crisis

Abbassi

Linzert

2012

Journal of Macroeconomics

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“…In addition, Stock and Watson [2002b] have pointed out the ability of credit spreads to forecast economic growth using dynamic factor analysis, and King, Levin, and Perli [2007] find that corporate bond spread indexes contain important information about the near-term likelihood of a recession. In a related vein, an extensive empirical literature has emphasized the extent to which the slope of the yield curve-the so-called term spreadprovides a signal for forecasting economic growth or for assessing the near-term risk of recession; see, for example, Dotsey [1998], Estrella and Hardouvelis [1991], Estrella and Mishkin [1998], and Hamilton and Kim [2002]. More recent work on this topic includes Ang, Piazzesi, and Wei [2006] and Wright [2006].…”

Section: Introductionmentioning

confidence: 99%

Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets

Gilchrist¹,

Yankov²,

Zakrajšek³

2009

140

136

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To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our "ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform-especially at longer horizons-standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30 percent of the forecast error variance in economic activity at the two-to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S. economic fluctuations during the 1990-2008 period.

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“…Harvey (1991) and Kim and Limpaphayom (1997) examine G7 economies and conclude that the term spread does not consistently contain information about future economic activity. Hamilton and Kim (2002) address the theoretical model toward the nature of the term spread. They nicely present that the term spread forecasting contribution is attributed to two effects: an expectation effect that shows a sign of the public's expectation on the future economic activities and a premium effect that represents the risk of investments in alternative assets.…”

Section: E Smoothed Probabilities With Different Variablesmentioning

confidence: 99%

Interconnections between Eurozone and US Booms and Busts Using a Bayesian Panel Markov-Switching VAR Mode

et al. 2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractInterconnections between Eurozone and United States booms and busts and among major Eurozone economies are analyzed using a Panel Markov-Switching VAR model. The model accommodates changes in low and high data frequencies and incorporates endogenous time-varying transition matrices of country-specific Markov chains. These country-specific Markov chains depend on their own past history and the history of other chains, thus allowing for interconnections between cycles, and an endogenous common Eurozone cycle is derived by aggregating the country-specific cycles. The model is estimated using a simulation based Bayesian approach in which an efficient multimove sampling algorithm is defined to draw time-varying Markov-switching chains. Using industrial production growth and credit spread data for all countries, several empirical results have emerged. Recession, slow growth and expansion are empirically identified as three regimes with slow growth becoming persistent in the Eurozone in recent years different from the US. The Eurozone and the US regimes appear not fully synchronized, with evidence of more recessions in the Eurozone. Second, turning point analysis indicates larger synchronization at the beginning of the Great Financial Crisis: this shock affects the US first, leading the Eurozone cycle, and spreads then rapidly among these economies. Third, amplification effects influence recession probabilities for Eurozone countries when shocks occur. The evidence is different for the US where this reinforcement does not exist. In recent years there are more imbalances among regimes in Eurozone countries. Fourth, a credit shock results in substantial negative industrial production growth for several months in Germany, Spain and the US. Our empirical results point towards the existence of a group of core countries: Germany, France and * We thank the co-editor Fabio Canova, three anonymous referees and conference and seminar participants

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A Reexamination of the Predictability of Economic Activity Using the Yield Spread

Cited by 302 publications

References 38 publications

The effectiveness of monetary policy in steering money market rates during the financial crisis

The effectiveness of monetary policy in steering money market rates during the financial crisis

Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets

Interconnections between Eurozone and US Booms and Busts Using a Bayesian Panel Markov-Switching VAR Mode

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