Asymmetry in the link between the yield spread and industrial production: threshold effects and forecasting
We analyse the nonlinear behaviour of the information content in the spread for future real economic activity. The spread linearly predicts one-year-ahead real growth in nine industrial production sectors of the USA and four of the UK over the last 40 years. However, recent investigations on the spread-real activity relation have questioned both its linear nature and its time-invariant framework. Our in-sample empirical evidence suggests that the spread-real activity relationship exhibits asymmetries that allow for different predictive power of the spread when past spread values were above or below some threshold value. We then measure the out-of-sample forecast performance of the nonlinear model using predictive accuracy tests. The results show that significant improvement in forecasting accuracy, at least for one-step-ahead forecasts, can be obtained over the linear model. Copyright © 2004 John Wiley & Sons, Ltd.
Year of publication: |
2004
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Authors: | Venetis, Ioannis A. ; Peel, David A. ; Paya, Ivan |
Published in: |
Journal of Forecasting. - John Wiley & Sons, Ltd.. - Vol. 23.2004, 5, p. 373-384
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Publisher: |
John Wiley & Sons, Ltd. |
Saved in:
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