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The Predictive Power of the Yield Spread under the Veil of Time

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Author Info
Zagaglia, Paolo () (Dept. of Economics, Stockholm University)

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Abstract

I apply a multiresolution decomposition to the term spread and real-GDP growth in the U.S. Using the filtered data, I study whether the yield spread helps forecasting output. The results show that the predictive power of the yield spread varies largely across time scales both in-sample and out-of-sample at various forecast horizons. Contrarily to the existing literature, I find evidence of a strikingly negative long-run relationship between the spread and future GDP growth over a frequency that spans from 8 to 16 years per cycle. A linear combination among filtered yield spreads shows a sizable improvement in forecasting out-of-sample. The decomposed series are also used for proposing a solution to the breakdown in the in-sample predictive relationship documented by Dotsey (1998) that occurs after 1985.

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Publisher Info
Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2006:4.

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Length: 19 pages
Date of creation: 16 Jun 2006
Date of revision:
Handle: RePEc:hhs:sunrpe:2006_0004

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Related research
Keywords: wavelets; term structure; predictability;

Find related papers by JEL classification:
C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Other
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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References listed on IDEAS
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  2. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
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  5. Joseph G. Haubrich & Ann M. Dombrosky, 1996. "Predicting real growth using the yield curve," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 26-35. [Downloadable!]
  6. repec:bep:sndecm:3:1998:1:23-42 is not listed on IDEAS
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  11. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
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  12. 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!]
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  14. Raffaella Giacomini & Barbara Rossi, 2006. "How Stable is the Forecasting Performance of the Yield Curve for Output Growth?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 783-795, December. [Downloadable!] (restricted)
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  15. Crowley, Patrick, 2005. "An intuitive guide to wavelets for economists," Research Discussion Papers 1/2005, Bank of Finland. [Downloadable!]
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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. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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