Predictive Power Of Yield Spread Research Articles

In Search of Leading Indicator Property of Yield Spread for India: An Approach Based on Quantile and Wavelet Regression

The leading indicator ability of yield spread for future output growth and inflation is tested for India. Using the yields on securities with maturities ten years and three months to construct yield spread, we study the predictive power of yield spread for output growth and inflation. Our results based on regression of future inflation and output on yield spreads indicate that there is no information in the yield spread about future economic activity and inflation in India. Further, the predictive power of yield spread is analyzed over different quantiles of inflation and output growth using quantile regression; we find that there is again no evidence of predictive information in the yield spreads. Using multiscale wavelet based regression, predictive power is however unveiled at higher time scales for output growth only.

The US zero-coupon yield spread as a predictor of excess daily stock market volatility

Slope of the yield curve has often been cited as an indicator of economic activity. Based on this premise, we extend the study to examine whether one can use the US zero-coupon yield spread to predict excess stock market volatility of three international stock markets – the United States, the United Kingdom and Hong Kong. By using daily trading data and changes in the US yield spread, our study entails four spread maturity spectrums, three stock markets, 7-trading day forecast horizons and four probit models. In the static models, we find evidence to support a US spread–volatility relationship in all three stock markets in the medium spread maturity up to 3 days ahead. In the dynamic models, although the predictive power of yield spread weakens slightly, the lagged dependent variable plays an important role.

The predictive power of yield spread: evidence from wavelet analysis

This paper examines whether the spread between long- and short-terminterest rates contains information about future economic activity in India. Using the yields on securities with maturities ranging from three months to ten years, we construct five different yield spreads at shorter end, longer end, and policy relevant area of the yield curve. We study the predictive power of each of these spreads for output growth within aggregate and time scale framework using wavelet methodology. We find that predictive power holds only at lower frequencies for the spreads which are constructed at shorter end and policy relevant areas of yield curve. However, spreads which are constructed at the longer end of the yield curve do not seem to have predictive information for output growth.

Identifying the Sources of the Predictive Ability of the Yield Spread

This paper aims at identifying the sources of the predictive power of the nominal yield spread for economic activity. For this purpose, we analyse the relationship between the yield spread and future GDP growth in an economy subject to three types of structural disturbances: Supply shocks, monetary shocks and shocks to term premia. The theoretical model extends the work of Harvey (1988) and Hu (1993), which attributes the correlation between the real term structure and future output growth to intertemporal consumption smoothing, by allowing short-term price stickiness in the economy. Sticky prices imply that economic disturbances generate expectations of future changes in output and inflation, thus allowing for intertemporal substitution effects and changes in both the real and the nominal term structure. We derive analytical solutions of the covariance between the nominal yield spread and future output growth and show that this covariance is not independent of the type of economic disturbances. Using data for the U.S. over the period 1957:1 - 2002:4, we find empirical evidence that the predictive power of the yield spread is due to supply shocks. In contrast, monetary shocks and term premia shocks generate a negative correlation between the yield spread and future economic activity, explaining why, at times, the predictive power of the yield spread may break down.