Asymmetry in the link between the yield spread and industrial production: threshold effects and forecasting
AbstractWe 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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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.
Volume (Year): 23 (2004)
Issue (Month): 5 ()
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Other versions of this item:
- Ivan Paya & David A. Peel & Ioannis A. Venetis, 2004. "Asymmetry In The Link Between The Yield Spread And Industrial Production. Threshold Effects And Forecasting," Working Papers. Serie AD 2004-41, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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