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Does the yield spread retain its forecasting ability during the 2007 recession? A comparative analysis

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  • Anastasios Evgenidis
  • Costas Siriopoulos

Abstract

We review spread's predictive ability by implementing a number of linear and probit models. We conduct a comparative analysis of the forecasting performance of various specifications by focusing on the last three major US economic slowdowns: 1990, 2001 and 2007. The results indicate that although linear models are useful in predicting the 1990 and 2001 decline in economic activity, none of these give signal of the major 2007 decline in output. Moreover, we find evidence that there is more information in the shape of the yield curve about the future economic activity than that provided by the spread alone. We also document that probit models are doing well in signalling the onset of 2007 subprime crisis although they fail to capture its duration.

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  • Anastasios Evgenidis & Costas Siriopoulos, 2014. "Does the yield spread retain its forecasting ability during the 2007 recession? A comparative analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 21(12), pages 817-822, August.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:12:p:817-822
    DOI: 10.1080/13504851.2014.884694
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    Cited by:

    1. Anastasios Evgenidis & Stephanos Papadamou, 2021. "The impact of unconventional monetary policy in the euro area. Structural and scenario analysis from a Bayesian VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5684-5703, October.
    2. Evgenidis, Anastasios & Papadamou, Stephanos & Siriopoulos, Costas, 2020. "The yield spread's ability to forecast economic activity: What have we learned after 30 years of studies?," Journal of Business Research, Elsevier, vol. 106(C), pages 221-232.
    3. Evgenidis, Anastasios & Tsagkanos, Athanasios & Siriopoulos, Costas, 2017. "Towards an asymmetric long run equilibrium between stock market uncertainty and the yield spread. A threshold vector error correction approach," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 267-279.
    4. Anastasios Evgenidis & Dionisis Philippas & Costas Siriopoulos, 2019. "Heterogeneous effects in the international transmission of the US monetary policy: a factor-augmented VAR perspective," Empirical Economics, Springer, vol. 56(5), pages 1549-1579, May.

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