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Leading Behavior of Interest Rate Term Spreads and Credit Risk Spreads in Korea

Listed author(s):
  • Won-Gi Kim

    ()

    (Department of Economics, Texas A&M University)

  • Noh-Sun Kwark

    ()

    (Department of Economics, Sogang University, Seoul)

Interest rate term spreads and credit spreads have been well known to have a predictive power for future fluctuations of output in many developed countries. This study examines leading behaviors of interest rate term spreads and credit risk spreads in Korea in two ways. First, we apply various empirical methods for finding leading behavior of interest rate term spreads and credit risk spreads in business fluctuations over the period spanning from May 1995 to January 2012. Second, using structural VAR models, we decompose the sources of fluctuations of output and interest rate spreads into two sorts, permanent real shocks and temporary financial shocks and examine the impulse response of each variable to the shocks focusing on the leading behavior of the spreads over the business cycle. We establish successfully the leading behavior of the term spread and the credit risk spread in Korea that the term spread tends to increase and the credit risk spread tends to shrink about 4 to 6 months before an expansion. We also find that much of the output fluctuations are attributed to real shocks while fluctuations in the interest rate spreads come from temporary financial shocks.

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File URL: ftp://163.239.156.99/wpaper/KNS_RIME_2012-3.pdf
File Function: First version, 2012
Download Restriction: no

Paper provided by Research Institute for Market Economy, Sogang University in its series Working Papers with number 1203.

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Length: 22 pages
Date of creation: Mar 2012
Handle: RePEc:sgo:wpaper:1203
Contact details of provider: Postal:
1 Sinsu-dong, Mapo-gu, Seoul 121-742

Phone: 82-2-705-8226
Fax: 82-2-705-8226
Web page: http://econdept.sogang.ac.kr/laboratory/information.do
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  1. Hamilton, James D & Kim, Dong Heon, 2002. "A Reexamination of the Predictability of Economic Activity Using the Yield Spread," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 340-360, May.
  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. Benjamin M. Friedman & Kenneth Kuttner, 1993. "Why Does the Paper-Bill Spread Predict Real Economic Activity?," NBER Chapters,in: Business Cycles, Indicators and Forecasting, pages 213-254 National Bureau of Economic Research, Inc.
  4. Kwark, Noh-Sun, 2002. "Default risks, interest rate spreads, and business cycles: Explaining the interest rate spread as a leading indicator," Journal of Economic Dynamics and Control, Elsevier, vol. 26(2), pages 271-302, February.
  5. 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.
  6. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244.
  7. Jacob Boudoukh & Matthew Richardson & Robert Whitelaw, 2005. "The Myth of Long-Horizon Predictability," NBER Working Papers 11841, National Bureau of Economic Research, Inc.
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