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The yield spread puzzle and the information content of SPF forecasts

Author

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  • Lahiri, Kajal
  • Monokroussos, George
  • Zhao, Yongchen

Abstract

While the yield spread has long been recognized as a good predictor of recessions, it seems to have been largely overlooked by professional forecasters. We examine this puzzle, established by Rudebusch and Williams (2009), in a data-rich environment including not just the yield spread but many other predictors as well. We confirm the puzzle in this context by examining the contributions of both the SPF forecasts and the yield spread in predicting recessions, and by examining the information content of SPF forecasts directly. Furthermore, we take the first step towards a possible resolution of this puzzle by recognizing the heterogeneity across professional forecasters.

Suggested Citation

  • Lahiri, Kajal & Monokroussos, George & Zhao, Yongchen, 2013. "The yield spread puzzle and the information content of SPF forecasts," Economics Letters, Elsevier, vol. 118(1), pages 219-221.
  • Handle: RePEc:eee:ecolet:v:118:y:2013:i:1:p:219-221
    DOI: 10.1016/j.econlet.2012.10.022
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    1. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2008. "Nowcasting: The real-time informational content of macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 665-676, May.
    2. Lahiri, Kajal & Monokroussos, George, 2013. "Nowcasting US GDP: The role of ISM business surveys," International Journal of Forecasting, Elsevier, vol. 29(4), pages 644-658.
    3. Lahiri, Kajal & Wang, J. George, 2013. "Evaluating probability forecasts for GDP declines using alternative methodologies," International Journal of Forecasting, Elsevier, vol. 29(1), pages 175-190.
    4. 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.
    5. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
    6. Domenico Giannone & Lucrezia Reichlin & David H. Small, 2005. "Nowcasting GDP and inflation: the real-time informational content of macroeconomic data releases," Finance and Economics Discussion Series 2005-42, Board of Governors of the Federal Reserve System (U.S.).
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    Citations

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    Cited by:

    1. Soojin Jo & Rodrigo Sekkel, 2019. "Macroeconomic Uncertainty Through the Lens of Professional Forecasters," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(3), pages 436-446, July.
    2. Chatterjee, Ujjal K., 2018. "Bank liquidity creation and recessions," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 64-75.
    3. Lahiri, Kajal & Peng, Huaming & Zhao, Yongchen, 2015. "Testing the value of probability forecasts for calibrated combining," International Journal of Forecasting, Elsevier, vol. 31(1), pages 113-129.
    4. Lahiri, Kajal & Yang, Liu, 2013. "Forecasting Binary Outcomes," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 1025-1106, Elsevier.
    5. Herman O. Stekler & Tianyu Ye, 2017. "Evaluating a leading indicator: an application—the term spread," Empirical Economics, Springer, vol. 53(1), pages 183-194, August.
    6. El-Shagi, Makram, 2019. "Rationality tests in the presence of instabilities in finite samples," Economic Modelling, Elsevier, vol. 79(C), pages 242-246.
    7. Liu, Weiling & Moench, Emanuel, 2016. "What predicts US recessions?," International Journal of Forecasting, Elsevier, vol. 32(4), pages 1138-1150.
    8. Lahiri, Kajal & Yang, Liu, 2016. "Asymptotic variance of Brier (skill) score in the presence of serial correlation," Economics Letters, Elsevier, vol. 141(C), pages 125-129.
    9. Pablo Aguilar & Jesús Vázquez, 2018. "Term structure and real-time learning," Working Papers 1803, Banco de España;Working Papers Homepage.

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    More about this item

    Keywords

    Probability forecasts; Yield spread; Real-time data;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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