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Leading indicator properties of the US corporate spreads

Listed author(s):
  • Nektarios Aslanidis

    (University of Monash)

  • Andrea Cipollini

    (University of Essex)

The focus of this paper is on the leading indicator properties of high-yield corporate spreads regarding the level of real economic activity. This is motivated by both the financial accelerator mechanism underlying business cycle fluctuations as suggested by Bernanke and Gertler (1989). We examine the out-of-sample forecast performance of the high-yield spreads regarding employment and industrial production in the US, using both a point forecast and a probability forecast exercise. Our main findings suggest the use of few factors obtained by pooling information from a number of sub sectors high-yield credit spreads. This can be justified by observing that there is a substantial gain from using a Dynamic Factor fitted to credit spreads compared to the prediction produced by benchmarks, such as an AR and ARDL models, where the exogenous regressor is either the term spread, or the aggregate high-yield spread.

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File URL: http://repec.org/mmf2006/up.30670.1145657733.pdf
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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 115.

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Date of creation: 02 Feb 2007
Handle: RePEc:mmf:mmfc06:115
Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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  1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  2. Joseph G. Haubrich & Ann M. Dombrosky, 1996. "Predicting real growth using the yield curve," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 26-35.
  3. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2003. "Do financial variables help forecasting inflation and real activity in the euro area?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1243-1255, September.
  4. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
  5. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
  6. Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 132-150, Autumn.
  7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
  8. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  9. Diebold, Francis X & Rudebusch, Glenn D, 1989. "Scoring the Leading Indicators," The Journal of Business, University of Chicago Press, vol. 62(3), pages 369-391, July.
  10. George Kapetanios & Massimiliano Marcellino, 2003. "A Comparison of Estimation Methods for Dynamic Factor Models of Large Dimensions," Working Papers 489, Queen Mary University of London, School of Economics and Finance.
  11. Mody, Ashoka & Taylor, Mark P., 2004. "Financial predictors of real activity and the financial accelerator," Economics Letters, Elsevier, vol. 82(2), pages 167-172, February.
  12. Benjamin M. Friedman & Kenneth N. Kuttner, 1998. "Indicator Properties Of The Paper-Bill Spread: Lessons From Recent Experience," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 34-44, February.
  13. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  14. Ashoka Mody & Mark P. Taylor, 2003. "The High-Yield Spread as a Predictor of Real Economic Activity: Evidence of a Financial Accelerator for the United States," IMF Staff Papers, Palgrave Macmillan, vol. 50(3), pages 1-3.
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  17. repec:cup:macdyn:v:5:y:2001:i:4:p:482-505 is not listed on IDEAS
  18. Pesaran, M Hashem & Timmermann, Allan, 1992. "A Simple Nonparametric Test of Predictive Performance," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 561-565, October.
  19. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
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  22. Forni, Mario & Lippi, Marco & Reichlin, Lucrezia, 2003. "Opening the Black Box: Structural Factor Models versus Structural VARs," CEPR Discussion Papers 4133, C.E.P.R. Discussion Papers.
  23. Michael Dotsey, 1998. "The predictive content of the interest rate term spread for future economic growth," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 31-51.
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