The Yield Curve and Predicting Recessions

By Jonathan H. Wright. 2006

233 citations recorded by the source corpus.

The slope of the Treasury yield curve has often been cited as a leading economic indicator, with inversion of the curve being thought of as a harbinger of a recession. In this paper, I consider a number of probit models using the yield curve to forecast recessions. Models that use both the level of the federal funds rate and the term spread give better in-sample fit, and better out-of-sample predictive performance, than models with the term spread alone. There is some evidence that controlling for a term premium proxy as well may also help. I discuss the implications of the current shape of the yield curve in the light of these results, and report results of some tests for structural stability and an evaluation of out-of-sample predictive performance.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/1f0630df33aa1ad2790ecaaa77871a0982218bc7

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In Economics and Econometrics

1. Egon Zakraǰsek
2. Vladimir Yankov
3. Henri Nyberg
4. Simon Gilchrist

Citations in the corpus

• Monetary policy report (2008, unknown): “/ Using a set of economic indicators prepared as per methods developed by Estrella and Mishkin (1998) and Wright (2006), the likelihood of recession is low, with a slowdown more likely.”
• Forecasting US Recessions: The Role of Sentiment (2014, unknown): “…empirical research documents that nancial variables such as the term spread, the short rate, and the stock market return are good predictors of future recessions, e.g. Estrella and Mishkin (1998), Wright (2006), Kauppi and Saikkonen (2008), and Nyberg 1Quotation from speech by Bernanke (2008).”
• Dynamic Probit Models and Financial Variables in Recession Forecasting (2010, result): “We found no evidence of structural breaks in the models presented in Tables I and II at conventional signifi - cance levels.5 The evidence is in line with the fi ndings of Estrella et al. (2003), Wright (2006) and Kauppi (2008).”
• Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets (2009, background): “Treasury yield curve reported in Gürkaynak, Sack, and Wright [2006]. To mitigate the effect of outliers, the analysis eliminates all observations with credit spreads smaller than 10 basis points and with spreads greater than 5,000 basis points; in addition, eliminated were issues with a par value of”