Economic Sentiment and Yield Spreads in Europe

Abstract

"According to""Harvey (1988)"", the forecasting ability of the term spread on economic growth is due to the fact that interest rates reflect investors' expectations about the future economic situation when deciding their plans for consumption and investment. Past literature has used ex post data on output or consumption growth as proxies for their expected value. In this paper, we employ a direct measure of economic agents' expectations, the Economic Sentiment Indicator elaborated by the European Commission, to test this hypothesis. Our results indicate that a linear combination of European yield spreads explains a surprising 93.7\% of the variability of the Economic Sentiment Indicator. This ability of yield spreads to capture economic agent expectations may be the actual reason for the predictive power of yield spreads about future business cycle." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Beyond Fundamentals: Investor Sentiment and Exchange Rate Forecasting

“…2 See, for example, Brown and Cliff (2005), Baker and Wurgler (2006), Kumar and Lee (2006), and Schmeling (2007). 3 The literature on sentiment is indeed not limited to assets or exchange rate returns: Ferreira et al (2008), for example, show that there is a connection between yield spreads and sentiment data. 4 For an overview of survey studies in the exchange rate context, we refer to MacDonald (2000) and Jongen et al (2008).…”

“…The literature on sentiment is indeed not limited to assets or exchange rate returns: Ferreira et al . (), for example, show that there is a connection between yield spreads and sentiment data.…”

Option‐Adjusted Delta Credit Spreads: a Cross‐Country Analysis

“…Service confidence, an indicator for European Commission, is not part of the ESI. The relationship between yields (not spreads) and ESI has been studied in particular by Ferreira et al (2000). 33 This matrix is generally called transition probability matrix.…”

Beyond Fundamentals: Investor Sentiment and Exchange Rate Forecasting

“…2 See, for example, Brown and Cliff (2005), Baker and Wurgler (2006), Kumar and Lee (2006), and Schmeling (2007). 3 The literature on sentiment is indeed not limited to assets or exchange rate returns: Ferreira et al (2008), for example, show that there is a connection between yield spreads and sentiment data. 4 For an overview of survey studies in the exchange rate context, we refer to MacDonald (2000) and Jongen et al (2008).…”