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Yield spreads as predictors of industrial production: expectations on short rates or term premia?

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  • Walid Hejazi

Abstract

This paper reconsiders information in the US T-bill term structure for predicting movements in real monthly industrial production. It is shown that although T-bill spreads contain little or no predictive content, increases in term premia estimated from a GARCH-M model of the term structure do. Since these estimated premia are linear functions of the conditional variance of excess returns, the implication is that increases in interest rate variability are associated with reductions in industrial production. This evidence is robust to the inclusion of the spread between the 10-year Tbond yield and one-month-T-bill yields. The T-bill term structure therefore contains information which is independent of the long-end of the term structure.

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  • Walid Hejazi, 2000. "Yield spreads as predictors of industrial production: expectations on short rates or term premia?," Applied Economics, Taylor & Francis Journals, vol. 32(8), pages 945-951.
    • Handle: RePEc:taf:applec:v:32:y:2000:i:8:p:945-951
    DOI: 10.1080/000368400321995
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    Cited by:

    1. Javier Gomez-Biscarri, 2009. "The predictive power of the term spread revisited: a change in the sign of the predictive relationship," Applied Financial Economics, Taylor & Francis Journals, vol. 19(14), pages 1131-1142.
    2. Matteo Modena, 2008. "The Term Structure and the Expectations Hypothesis: a Threshold Model," Working Papers 2008_36, Business School - Economics, University of Glasgow.
    3. Georgopoulos, George & Hejazi, Walid, 2009. "Financial structure and the heterogeneous impact of monetary policy across industries," Journal of Economics and Business, Elsevier, vol. 61(1), pages 1-33.
    4. Marco Matsumura & Ajax Moreira, 2011. "Assessing macro influence on Brazilian yield curve with affine models," Applied Economics, Taylor & Francis Journals, vol. 43(15), pages 1847-1863.
    5. Modena, Matteo, 2008. "Yield curve, time varying term premia, and business cycle fluctuations," MPRA Paper 8873, University Library of Munich, Germany.
    6. James Kung, 2008. "Dynamic strategies for fixed-income investment," Applied Economics, Taylor & Francis Journals, vol. 40(10), pages 1341-1354.
    7. Kyojik Song, 2009. "Does debt market timing increase firm value?," Applied Economics, Taylor & Francis Journals, vol. 41(20), pages 2605-2617.
    8. Mark Thompson, 2007. "Are adjustments in the default risk premium asymmetric?," Applied Economics, Taylor & Francis Journals, vol. 39(21), pages 2693-2698.

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