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Asymmetry in the link between the yield spread and industrial production: threshold effects and forecasting

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  • Ioannis A. Venetis

    (Centre of Planning and Economic Research (KEPE), Athens, Greece)

  • David A. Peel

    (Lancaster University Management School, UK)

  • Ivan Paya

    (Departamento Fundamentos Analisis Economico, University of Alicante, Spain)

Abstract

We analyse the nonlinear behaviour of the information content in the spread for future real economic activity. The spread linearly predicts one-year-ahead real growth in nine industrial production sectors of the USA and four of the UK over the last 40 years. However, recent investigations on the spread-real activity relation have questioned both its linear nature and its time-invariant framework. Our in-sample empirical evidence suggests that the spread-real activity relationship exhibits asymmetries that allow for different predictive power of the spread when past spread values were above or below some threshold value. We then measure the out-of-sample forecast performance of the nonlinear model using predictive accuracy tests. The results show that significant improvement in forecasting accuracy, at least for one-step-ahead forecasts, can be obtained over the linear model. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Ioannis A. Venetis & David A. Peel & Ivan Paya, 2004. "Asymmetry in the link between the yield spread and industrial production: threshold effects and forecasting," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(5), pages 373-384.
    • Handle: RePEc:jof:jforec:v:23:y:2004:i:5:p:373-384
    DOI: 10.1002/for.921
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    1. Yutaka Kurihara, 2014. "Does High Yield Spread Dampen Economic Growth?: The Case of US-Japan," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 3(2), pages 01-09, April.
    2. Schrimpf, Andreas & Wang, Qingwei, 2010. "A reappraisal of the leading indicator properties of the yield curve under structural instability," International Journal of Forecasting, Elsevier, vol. 26(4), pages 836-857, October.
    3. Huseyin Kaya, 2013. "On the Predictive Power of Yield Spread for Future Growth and Recession: The Turkish Case," Working Papers 010, Bahcesehir University, Betam, revised Mar 2013.
    4. Bruno, Giancarlo, 2009. "Non-linear relation between industrial production and business surveys data," MPRA Paper 42337, University Library of Munich, Germany.

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