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An Empirical Analysis of the Predictive Power of European Yield Curves

Author

Listed:
  • Marcell Peter Granat

    (Magyar Nemzeti Bank, John Von Neumann University, Eotvos Lorand University)

  • Gabor Neszveda

    (Magyar Nemzeti Bank, John Von Neumann University)

  • Dorottya Szabo

    (University of Lisbon)

Abstract

For various reasons, the yield curve of government bonds serves as a reliable predictor of recessions in the US. This study provides an empirical analysis of whether there is such a relationship in European countries. The methodological framework employed in this study encompasses the utilisation of the Hodrick- Prescott filter in conjunction with a probit model. The modelling procedure in the literature is extended by optimally combining government bond maturity spreads and examining whether the results are also robust for European yield curves. The main finding of the paper is that in the US the spreads calculated from the yield of 7-year and 1-year government bonds are the best predictors, and they are similarly suitable for predicting economic crises in half of the European countries as well.

Suggested Citation

  • Marcell Peter Granat & Gabor Neszveda & Dorottya Szabo, 2023. "An Empirical Analysis of the Predictive Power of European Yield Curves," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 22(3), pages 48-66.
    • Handle: RePEc:mnb:finrev:v:22:y:2023:i:3:p:48-66
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    References listed on IDEAS

    as
    1. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    2. György Matolcsy & Dániel Palotai, 2016. "The interaction between fiscal and monetary policy in Hungary over the past decade and a half," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 15(2), pages 5-32.
    3. Rudebusch, Glenn D. & Williams, John C., 2009. "Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 492-503.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    yield curve; recession; probit model;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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