Does the term structure forecast
Relying on a simple general equilibrium model of the term structure, both nominal yields and real consumption growth rates can be shown to be aÂ±ne in the unobservable state variables. We can then express real consumption growth rates in terms of nominal yields rather than the unobservable state variables with the coeÂ±cients of the resultant forecasting relation being endogenously determined by the term structure model. In this sense, we use the entire term structure to forecast real consumption growth rates and provide empirical evidence consistent with the model more accurately predicting real consumption growth rates than a regression model based on the term spread.
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- Diebold, Francis X & Mariano, Roberto S, 2002.
"Comparing Predictive Accuracy,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(1), pages 134-44, January.
- Duffee, Gregory R, 1999.
"Estimating the Price of Default Risk,"
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Society for Financial Studies, vol. 12(1), pages 197-226.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
- Chapman, David A., 1997. "The cyclical properties of consumption growth and the real term structure," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 145-172, July.
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