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Shape Evolution of the Interest Rate Term Structure

Author

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  • Biwei Chen

    (State University of New York at Binghamton)

Abstract

"This paper adopts a novel approach to studying the evolution of interest rate term structure over the U.S. business cycles and to predicting recessions. Applying an effective algorithm, I classify the Treasury yield curve into distinct shapes and find the less frequent shapes intrinsically linked to the recessions in the post-WWII data. In forecasting recessions, the median-short yield spread trumps the long-short spread for horizons up to 17 months ahead and the yield curve shape is nearly impressive as the median-short spread. Overall, the yield curve shape is an informative but more succinct indicator than the spreads in studying the term structure. Key words: Business cycle, recession forecast, U.S. Treasury yield curve, yield spreads."

Suggested Citation

  • Biwei Chen, 2022. "Shape Evolution of the Interest Rate Term Structure," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 13(4), pages 427-457, January.
    • Handle: RePEc:ren:journl:v:13:y:2022:i:4:p:427-457
    DOI: https://doi.org/10.15353/rea.v13i3.4698
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    More about this item

    Keywords

    Business cycle; recession forecast; U.S. Treasury yield curve; yield spreads;
    All these keywords.

    JEL classification:

    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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