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Do Eurozone yield spreads predict recessions?

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  • Schock, Matthias

Abstract

An OLS and probit framework is used to examine the predictive power of yield spreads with respect to GDP growth and recessions in the Eurozone from the 1990s to the recent past. Credit default swap (CDS) data on sovereign bonds, which provide a direct measure of default risk, are employed as part of a new risk-adjustment method that significantly enhances the predictive accuracy of the yield-spread approach. The results show that the accuracy of predictions of growth and recessions using the commonly employed yield spread remains high, provided that biases associated with Eurozone sovereign default risk are accounted for.

Suggested Citation

  • Schock, Matthias, 2014. "Do Eurozone yield spreads predict recessions?," Hannover Economic Papers (HEP) dp-532, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    • Handle: RePEc:han:dpaper:dp-532
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    References listed on IDEAS

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    1. Schock, Matthias, 2015. "Predicting Economic Activity via Eurozone Yield Spreads: Impact of Credit Risk," Hannover Economic Papers (HEP) dp-542, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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    Keywords

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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