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Asymmetry in the link between the yield spread and industrial production: threshold effects and forecasting

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Author Info
Ioannis A. Venetis (Centre of Planning and Economic Research (KEPE), Athens, Greece)
David A. Peel (Lancaster University Management School, UK)
Ivan Paya (Departamento Fundamentos Analisis Economico, University of Alicante, Spain)

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Abstract

We analyse the nonlinear behaviour of the information content in the spread for future real economic activity. The spread linearly predicts one-year-ahead real growth in nine industrial production sectors of the USA and four of the UK over the last 40 years. However, recent investigations on the spread-real activity relation have questioned both its linear nature and its time-invariant framework. Our in-sample empirical evidence suggests that the spread-real activity relationship exhibits asymmetries that allow for different predictive power of the spread when past spread values were above or below some threshold value. We then measure the out-of-sample forecast performance of the nonlinear model using predictive accuracy tests. The results show that significant improvement in forecasting accuracy, at least for one-step-ahead forecasts, can be obtained over the linear model. Copyright © 2004 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.921
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 23 (2004)
Issue (Month): 5 ()
Pages: 373-384
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Handle: RePEc:jof:jforec:v:23:y:2004:i:5:p:373-384

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Galbraith, John W. & Tkacz, Greg, 2000. "Testing for asymmetry in the link between the yield spread and output in the G-7 countries," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 657-672, October. [Downloadable!] (restricted)
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  2. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June. [Downloadable!] (restricted)
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  3. Bruce E. Hansen, 1997. "Inference in TAR Models," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 2(1). [Downloadable!]
  4. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 31-51. [Downloadable!]
  5. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Giancarlo Bruno, 2009. "Non-linear relation between industrial production and business surveys data," ISAE Working Papers 119, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
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