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A reappraisal of the leading indicator properties of the yield curve under structural instability

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  • Schrimpf, Andreas
  • Wang, Qingwei

Abstract

This paper provides an extensive re-examination of the leading indicator properties of the yield curve in four major developed countries (Canada, Germany, the United Kingdom, and the United States). We study whether the yield spread still qualifies as a useful predictor of real activity in the presence of structural change. Based on tests for multiple structural breaks, we find strong evidence of instability in the relationship between the yield spread and output growth, which allows us to pin down the exact dates associated with these breaks for the different countries. We find that the window selection methods recently developed for forecasting in the presence of structural change generally offer some improvements in terms of forecast accuracy. However, our overall results strongly suggest that the yield curve has been losing its edge as a predictor of output growth in recent years.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 26 (2010)
Issue (Month): 4 (October)
Pages: 836-857

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Handle: RePEc:eee:intfor:v:26:y::i:4:p:836-857

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Web page: http://www.elsevier.com/locate/ijforecast

Related research

Keywords: Yield curve Macroeconomic forecasting Structural change Forecast window selection Forecast breakdowns;

References

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Citations

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Cited by:
  1. Møller, Stig V., 2014. "GDP growth and the yield curvature," Finance Research Letters, Elsevier, vol. 11(1), pages 1-7.
  2. M Hashem Pesaran & Andreas Pick & Mikhail Pranovich, 2011. "Optimal Forecasts in the Presence of Structural Breaks," DNB Working Papers 327, Netherlands Central Bank, Research Department.
  3. Nektarios Aslanidis & Charlotte Christiansen & Christos S. Savva, 2013. "Risk-Return Trade-Off for European Stock Markets," CREATES Research Papers 2013-31, School of Economics and Management, University of Aarhus.
  4. Pesaran, M.H. & Pick, A. & Pranovich, M., 2011. "Optimal Forecasts in the Presence of Structural Breaks (Updated 14 November 2011)," Cambridge Working Papers in Economics 1163, Faculty of Economics, University of Cambridge.
  5. Barbara Rossi, 2011. "Advances in Forecasting Under Instability," Working Papers 11-20, Duke University, Department of Economics.

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