Publication details
The employment of goverment bond spreads in prediction of economic activity in EU-15
| Authors | |
|---|---|
| Year of publication | 2014 |
| Type | Article in Proceedings |
| Conference | Conference Proceedings of the 12th International Scientific Conference "Economic Policy in the European Union Member Countries" |
| MU Faculty or unit | |
| Citation | |
| Field | Economy |
| Keywords | GDP prediction; yield curve; slope; spread |
| Description | The yield curve – specifically the spread between long term and short term interest rates is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead. The steepness of the yield curve should be an excellent indicator of a possible future economic activity. A rise in the short rate tends to flatten the yield curve as well as to slow real growth the near term. This paper aims to analyse the dependence between slope of the yield curve and an economic activity of EU-15 between the years 2000 and 2013. The slope of the yield curve can be measured as the yield spread between sovereign 10-year bonds and sovereign 3-month bonds. The natural and probably the most popular measure of economic growth is by GDP growth, taken quarterly. The results showed that the best predictive lag of spread is a lag of four and five quarters. The theory says that it should be lag of four quarters. The results presented also confirm that 10-year and 3-month yield spread has significant predictive power for real GDP growth after financial crisis. These findings can be beneficial for investors and provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity. |
| Related projects: |