The Predictive Power of the Yield Spread: Further Evidence and a Structural Interpretation

Favero, Carlo A.; Kaminska, Iryna; Söderström, Ulf

doi:10.2139/ssrn.659962

Cited by 29 publications

(22 citation statements)

References 27 publications

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“…Additionally, in Canada, the statistic sharply rises from about 0.1 to about 0.4 if the yield spread is separated into two components. Ang et al (2006) and Favero et al (2005) also report similar results from the equation for future real activities. Targeting 21 results represented by the two metrics are consistent with each other.…”

Section: Discussionsupporting

confidence: 60%

“…This indicates that if the current TP were to be increased, then the economy would be stimulated. This is contrary to what the market practitioners expect, but is consistent with the empirical results of Favero et al (2005) and Hamilton and Kim (2002). In the US, the estimates of the TP coefficient in period 1 are positive for shorter horizons (less than one year) while they are negative for longer horizons (14th quarter to 16th quarter), which is the opposite result from that given by Jardet et al (2013).…”

Section: Predictability Based On the Single Forecasting Equationsupporting

confidence: 64%

“…By contrast, the empirical results with respect to the TP are inconsistent. Hamilton and Kim (2002) and Favero, Kaminska, and Söderström (2005) find the positive predictability of future output growth in the US despite the fact that the methods for inferring expected short-term interest rate are different from each other: using expost short-term interest rates and an out-of-sample estimation, respectively. However, Rudebusch, Sack and Swanson (2007) point out that there is a gap between the results from these academic researches and the market's perception.…”

Section: Related Literaturementioning

confidence: 99%

“…The EH component at time t could be computed with the average of current and those expected short-term rates under EH in equation (1) and the TP could be the difference between the 10-year bond yield and this EH component. Evans and Marshall (2007) and Favero et al (2005) also use this kind of VAR framework as their estimation tools. These VAR measures of the two components are extracted under the assumption that the short-term interest rate is influenced only by the two macroeconomic variables: inflation and output growth.…”

Section: Gaussian Var(4) Modelmentioning

confidence: 99%

“…Almost all of the estimation equations regarding the predictive power of the two components in the related literature are analogous to the form of equation (11). For example, Ang et al (2006), Favero et al (2005), Hamilton and Kim (2002), and , reviewed in the second section, all estimate a similar single equation for investigating the predictability. The second metric of predictability is obtained through the variance decomposition analysis based on a VAR framework.…”

Section: The Predictive Power Of Two Componentsmentioning

confidence: 99%

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Disentangling the Predictive Power of Term Spreads under Inflation Targeting

Lee

2015

International Economic Journal

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Under inflation targeting, S. Cho and J. Lee (2014, Inflation targeting and predictive power of term spreads. Seoul Journal of Economics, 27, 391-419), A. Estrella (2005, Why does the yield curve predict output and inflation? The Economic Journal, 115, 722-744) and P.L. Siklos (2000, Inflation targets and the yield curve: New Zealand and Australia versus the US. International Journal of Finance & Economics, 5,[15][16][17][18][19][20][21][22][23][24][25][26][27][28][29][30][31][32] have reported that the predictive power of yield spreads for future inflation decreases in inflation targeting countries. In this paper, we decompose the yield spread into the expectations hypothesis component and the term premium, and find that the decrease in the predictability is mostly due to the deterioration of information embedded in the expectations hypothesis component. Our finding reveals that if inflation targeting is successful in achieving its main goal, then the expectations for future inflation are anchored at the target inflation rate (or range), and thereby the predictive contents of the term spreads regarding future inflation decrease.

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Section: Discussionsupporting

confidence: 60%

Section: Predictability Based On the Single Forecasting Equationsupporting

confidence: 64%

Section: Related Literaturementioning

confidence: 99%

Section: Gaussian Var(4) Modelmentioning

confidence: 99%

Section: The Predictive Power Of Two Componentsmentioning

confidence: 99%

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Disentangling the Predictive Power of Term Spreads under Inflation Targeting

Lee

2015

International Economic Journal

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Downturns and changes in the yield slope

Abbritti,

Equiza,

Moreno

et al. 2023

Journal of Forecasting

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We show that the slope of the sovereign yield curve predicts future economic activity not only through its level but also through its changes (or differences) over time. Our results with US data show that the additional inclusion of the changes of the yield slope in the traditional regressions significantly increases the explanatory power of the yield curve. Through the yield slope decomposition, we find that positive changes in both the risk‐neutral spread and the term premium increase the likelihood of recession in the next 3 or 12 months. Estimated linear equations that directly forecast economic activity confirm the predictive power of both components in the medium run. These predictive equations also identify the term premium as the relevant component of yield slope changes for medium‐run (3–12 months) forecasts. Our out‐of‐sample exercises show that the empirical models including both the level and the differences of the slope perform better than the models including only the yield slope level.

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Information in the Yield Curve: A Macro-Finance Approach

2012

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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 Statement of purpose:The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium. OrdersFor orders and information on subscriptions and reductions: National Bank of Belgium, Documentation -Publications service, boulevard de Berlaimont 14, 1000 Brussels.Tel +32 2 221 20 33 -Fax +32 2 21 30 42The Working Papers are available on the website of the Bank: http://www.nbb.be. AbstractWe use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the U.S. bond market. Estimating the model using Bayesian techniques, we find that a single factor explains most of the variation in bond risk premiums. Furthermore, the modelimplied risk premiums account for up to 40% of the variability of one-and two-year excess returns.Using the model to decompose yield spreads into an expectations and a term premium component, we find that, although this decomposition does not seem important to forecast economic activity, it is crucial to forecast inflation for most forecasting horizons.

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The Predictive Power of the Yield Spread: Further Evidence and a Structural Interpretation

Cited by 29 publications

References 27 publications

Disentangling the Predictive Power of Term Spreads under Inflation Targeting

Disentangling the Predictive Power of Term Spreads under Inflation Targeting

Downturns and changes in the yield slope

Information in the Yield Curve: A Macro-Finance Approach

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