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The Role of Financial Spreads: Empirical Analysis of Spreads and Real Activity

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  • Davis, E Philip
  • Henry, S G B
  • Pesaran, B

Abstract

The issues of interpretation and estimation of VAR models of output which use financial spreads as indicators are reviewed and new empirical evidence is provided using U.K. data. The principal extensions to the existing U.S. literature are estimation of the role of spreads in the context of a cointegrating model as well as a dynamic VAR, and also use of the reverse yield gap (bond yield less equity yield) as an alternative indicator to traditional spreads such as the yield gap and credit quality spread. The evidence presented suggests financial spreads may have an important indicator function in the U.K., especially in predicting short-run movements in the real economy. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Davis, E Philip & Henry, S G B & Pesaran, B, 1994. "The Role of Financial Spreads: Empirical Analysis of Spreads and Real Activity," The Manchester School of Economic & Social Studies, University of Manchester, vol. 62(4), pages 374-394, December.
  • Handle: RePEc:bla:manch2:v:62:y:1994:i:4:p:374-94
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    Cited by:

    1. Nii Ayi Armah & Norman Swanson, 2011. "Some variables are more worthy than others: new diffusion index evidence on the monitoring of key economic indicators," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 43-60.
    2. Fabio ALESSANDRINI, 2003. "Do Financial Variables Provide Information about the Swiss Business Cycle ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.02, Université de Lausanne, Faculté des HEC, DEEP.
    3. Andrea Nobili, 2005. "Forecasting Output Growth And Inflation In The Euro Area: Are Financial Spreads Useful?," Temi di discussione (Economic working papers) 544, Bank of Italy, Economic Research and International Relations Area.

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