Has the predictability of the yield spread changed?

Dong Heon Kim, Euihwan Park

Research output: Contribution to journalArticle

Abstract

This paper examines the stability of the predictive power of the yield spread for future GDP growth. We find that the ability of the spread to predict future GDP growth has weakened since 1984:Q1. Given the decomposition of the yield spread into the expectation component and the term premium component, we investigate the change in the predictability of both components and find that the term premium component appears to have lost the predictive power significantly while the predictive power of the expectation component has remained. We conjecture that since the 1984:Q1, the cyclical movement of the term premium seems to have been reduced due to the significant reduction in the volatility of US macroeconomy.

Original languageEnglish
Pages (from-to)449-463
Number of pages15
JournalSeoul Journal of Economics
Volume31
Issue number4
Publication statusPublished - 2018 Jan 1

Keywords

  • Break
  • Expectations effect
  • Great Moderation
  • Predictability
  • Term premium effect
  • Yield spread

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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