What Does the Yield Curve Tell us about GDP Growth?

Ang, Andrew; Piazzesi, Monika; Wang, Min

doi:10.3386/w10672

Cited by 229 publications

(347 citation statements)

References 1 publication

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“…The absence of effects on SGRO is consistent with the results in Ang, Piazzesi, and Wei () that term premiums are insignificant in predicting future GDP growth within an MTSM that enforces spanning of GDP growth by bond yields. What their model does not accommodate is our finding that term premium shocks do affect growth through their effects on unspanned real activity.…”

supporting

confidence: 87%

“…See Litterman and Scheinkman (), Dai and Singleton (), and Duffee () for supporting evidence. Ang, Piazzesi, and Wei () and Bikbov and Chernov (), among others, draw explicitly on this evidence when setting the number of risk factors.…”

mentioning

confidence: 99%

“…Ang, Piazzesi, and Wei () and Jardet, Monfort, and Pegoraro () focus on models in which

G R O_{t}

is the sole macro risk. Kim and Wright () explore MTSMs in which expected inflation is the sole macro risk.…”

mentioning

confidence: 99%

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Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks

Joslin¹,

Priebsch²,

Singleton

2014

The Journal of Finance

391

106

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This paper quantifies how variation in economic activity and inflation in the UnitedStates influences the market prices of level, slope, and curvature risks in Treasury markets. We develop a novel arbitrage-free dynamic term structure model in which bond investment decisions are influenced by output and inflation risks that are unspanned by (imperfectly correlated with) information about the shape of the yield curve. Our model reveals that, between 1985 and 2007, these risks accounted for a large portion of the variation in forward terms premiums, and there was pronounced cyclical variation in the market prices of level and slope risks.

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supporting

confidence: 87%

mentioning

confidence: 99%

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Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks

Joslin¹,

Priebsch²,

Singleton

2014

The Journal of Finance

391

106

View full text Add to dashboard Cite

show abstract

“…Estrella and Mishkin () find that increases in the slope of the term structure are associated with increases in anticipated inflation. Estrella and Mishkin () and Ang, Piazzesi, and Wei () also find that decreases in the slope of the term structure foreshadow poor economic conditions. This suggests that an increase in the slope of the term structure, signaling a rise in forward rates, can foreshadow economic events that can lead to a rise in interest rates.…”

Section: Reasons For Issuing a Callable Bondmentioning

confidence: 92%

The Choice Between Callable and Noncallable Bonds

Booth¹,

Gounopoulos

Skinner

2014

J of Financial Research

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We examine the choice and the offer spreads between callable and noncallable bonds. We find significant differences by industry sector and therefore segment our results by financial and nonfinancial industries. For the financial sector, the popularity of callable and noncallable bonds is significantly related to the economic environment. Financial and high-grade nonfinancial callable bonds are also more likely to be issued via a shelf prospectus. Although firms that issue callable bonds do not consistently display the characteristics associated with severe agency problems, the issue choice for belowinvestment-grade nonfinancial and lower rated financial bonds, where we can expect agency problems to be more severe, is more consistent with agency theory than is the issue choice for higher rated bonds. characteristics associated with agency problems? Finally, do issuers pay a premium for the call feature?This article is related to a series of studies that examine the motivation and offer spreads of different types of callable bonds. Daniels, Diro Ejara, and Vijayakumar (2009) examine the motivation and offer spreads of bond clawbacks, and Nayar and Stock (2008) study make-whole bonds. Clawbacks and make-whole bonds are special types of callable bonds that restrict the refunding of callable bonds to issues of equity (clawbacks) or adjusts the call price at the date of call (make-whole). Banko and Zhou (2010) revisit the agency theoretic explanations for callable bonds, and Chen, Mao, and Wang (2010) examine the refunding behavior of callable bonds. We add to this body of work by examining the time-varying popularity of ordinary callable bonds and the influence that the issue process, bond covenants, and economic environment have on the offer spread for callable and noncallable bonds and on the value of call premiums. Unlike most studies in this area, we include financial firms as a larger number of callable bonds are issued by financial firms than by industrial and utility bonds combined during our 1995-2008 sample period. We also include financial bonds in our sample because we wish to determine whether the financing of financial firms is subject to the same agency theoretic problems as industrial firms.Other work includes the influence of the economic environment on the popularity of callable bonds, but evidence is fragmentary and contradictory. For example, Kish and Livingston (1992), Güntay, Prabhala, and Unal (2002), and Banko and Zhou (2010) find that the popularity is increasing, but Sarkar (2001) finds that the popularity of a call feature is decreasing in the level of interest rates. However, all of this work occurs during the time the call feature was being reengineered through the introduction of make-whole and clawback refinements to the call feature (see Goyal, Gollapudi, and Ogden 1998;Nayar and Stock 2008). Moreover, none of this work accounts for the full range of interest rate and credit risk environment variables. In contrast, we examine the impact of the economic environment by including proxies fo...

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“…After periods of increased interest rates, up to flat or inverse yield curve, the probability of a slowdown in economic growth is 3/3, since 1977 (100% for the three last downturns in 1982, 1990 and 2001) for USA since 1975. Bernard (1996, Elliott (1977) and Ang (2003) supports this finding by stating that the SR interest rate is crucial when determining GDP and that especially the slope of the yield curve is a leading indicator for economic growth (explaining more than any other factor) and that the effects will be strengthened by the span between long and short interest rates. The reason is where central banks decide their policy to be either contractive or expansive in the SR related to the markets determination of the LR interest rate.…”

Section: Initiation Of Price Decreasesmentioning

confidence: 94%

The Dynamics of House Prices - International Evidence

Sorensen

2006

SSRN Journal

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EXECUTIVE SUMMARYReal estate is the largest single contributor to GDP, and has been increasingly important in the latest years making the economies highly dependent on the housing market. By being the largest asset and liability for households, the investment is crucial for households. Today there are concerns about the existence of a housing bubble. A bubble has been defined to be able to combine theory and econometrical tools to make it possible to observe a bubble before it bursts. Bubbles are, according to this view, described as the unexplained factor, which in the LR converge to 0. Deviations from equilibrium defined by fundamentals will only be temporary.A combination of Potherba's model and Tobin's q will give the theoretical basis to analyze how shocks affect the housing market. One of the most important features is that supply of housing is very inelastic (especially in city areas) in the SR and MR highly dependent on regional planning.Real house prices in N, NL, UK and USA are all at the highest level ever, especially due to the increases that have occurred in the latest decade. Returns on houses have therefore been abnormally high compared to historic averages. Periods of price increases are in general found to be longer than periods of price decreases and the latest increases has been identified to be one of the longest with the highest aggregated price increases in history.I have performed an econometrical analysis of annual data further back than any other previous research has done and it will be the foundation to explain the latest development.Income, rent and construction costs are found to be the most important variables in the dynamics of long run house prices. All variables have the expected sign and are statistically significant. I have tried to include a demographic variable was not significant in the prediction of house prices in the SR or LR. 1In the SR previous house price movements are the only factor being able to explain the dynamics. The housing market is in the SR driven by momentum, since prices tend to experience clustering of either price increases or decreases making the housing market boom and bust likely. In the LR prices will however follow a mean reverting process, but this process is discovered to be very slow, whereas deviation from equilibrium can be large.None of the fundamentals have been capable of explaining the latest decade of house price increases, whereas there is a risk that a structural change has occurred or that an explaining variable has not yet been discovered.There are a great variety of explanations and models for the housing market, but none of these have been able to explain the latest increases in house prices and other periods throughout history. The main alternative explanation that no one has yet been able to model, because of its complexity, is a variable to describe financial liberalization and credit. Lately financial innovations has changed the financing of houses, but it remains uncertain if it can explain the residual that then it is ...

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What Does the Yield Curve Tell us about GDP Growth?

Cited by 229 publications

References 1 publication

Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks

Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks

The Choice Between Callable and Noncallable Bonds

The Dynamics of House Prices - International Evidence

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