A Joint Dynamic Bi-Factor Model of the Yield Curve and the Economy as a Predictor of Business Cycles

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A Joint Dynamic Bi-Factor Model of the Yield Curve and the Economy as a Predictor of Business Cycles

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Chauvet, Marcelle
Senyuz, Zeynep

Additional information is available for the following registered author(s):

Marcelle Chauvet

Abstract

This paper proposes an econometric model of the joint dynamic relationship between the yield curve and the economy to predict business cycles. We examine the predictive value of the yield curve to forecast both future economic growth as well as the beginning and end of economic recessions at the monthly frequency. The proposed multivariate dynamic factor model takes into account not only the popular term spread but also information extracted from the entire yield curve. The nonlinear model is used to investigate the interrelationship between the phases of the bond market and of the business cycle. The results indicate a strong interrelation between these two sectors. Although the popular term spread has a reasonable forecasting performance, the proposed factor model of the yield curve exhibits substantial incremental predictive value. This result holds in-sample and out-of-sample, using revised or real time unrevised data.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15076.

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Date of creation: Dec 2008
Date of revision: Apr 2009
Handle: RePEc:pra:mprapa:15076

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

This paper has been announced in the following NEP Reports:

NEP-ALL-2009-05-09 (All new papers)
NEP-ECM-2009-05-09 (Econometrics)
NEP-FOR-2009-05-09 (Forecasting)
NEP-MAC-2009-05-09 (Macroeconomics)

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