Abstract
AbstractThe cyclical variation behavior of the mortgage spread has motivated some studies to investigate its relationship to economic activity. Indeed, recent empirical findings indicate that the mortgage spread is a determinant/predictor of economic activity. We define the mortgage spread as the difference between the 30-year mortgage and 10-year Treasury rates and ask whether the Blue Chip (consensus) forecasts of these series are accurate for 1988–2015. Our findings indicate that the Blue Chip forecasts of both the 30-year mortgage and 10-year Treasury rates are biased, fail to outperform the random walk benchmark, and are directionally inaccurate. However, the Blue Chip forecasts of the mortgage spread are generally unbiased, outperform the random walk benchmark, and are directionally accurate—thus of value to a user. Given such evidence, a natural extension for future research is to explore whether the predictive information content of Blue Chip forecasts of the mortgage spread is a better predictor ...
Highlights
A strand of research asks whether financial spreads contain useful predictive information for output growth and inflation (Aretz & Peel, 2010; Estrella & Hardouvelis, 1991; Estrella & Mishkin, 1997; Stock & Watson, 2003). Estrella (2005) constructs a formal macroeconomic model to provide the theoretical rationale for predictive information of the term spread
Theory suggests that the best forecast of the long-term interest rate is the random walk forecast, defined as the most recent rate known at the time of the forecast (Pesando, 1979; Reichenstein, 2006). Consistent with this theory and related existing empirical evidence (Baghestani, 2006, 2008, 2009a; Brooks & Gray, 2004), our findings indicate that Blue Chip forecasts of both the 30-year mortgage rate and the 10-year Treasury rate are biased, fail to outperform the random walk benchmark, and are directionally inaccurate
In evaluating Blue Chip forecasts of the 30-year mortgage rate, 10-year Treasury rate, and mortgage spread, we focus on answering the following three questions: (1) Are Blue Chip forecasts unbiased? (2) Are Blue Chip forecasts more informative than the random walk benchmark? (3) Are Blue Chip forecasts directionally accurate?
Summary
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