Real term structure forecasts of consumption growth

Efthymios Argyropoulos and Elias Tzavalis

Journal of Empirical Finance, 2015, vol. 33, issue C, 208-222

Abstract: This paper employs an empirically tractable affine term structure model of real interest rates to examine the predictive ability of the real short-term interest rate and its term spread with a longer-term interest rate to predict future real consumption growth. The estimates of the model provide support of the consumption smoothing hypothesis. The paper shows that the real term structure is spanned by two mean-reverting state variables. The mean-reverting property of these variables can consistently explain the forecasting ability of the short-term real rate and term spread to forecast future consumption growth rate, over different horizons ahead. Although the risks associated with changes in these variables are both priced in the market, they are not volatile enough to obscure the information of the real term structure about future real consumption growth.

Keywords: Real term structure of interest rates; Gaussian affine term structure models; Price of risk; Principal component analysis; Consumption forecasts (search for similar items in EconPapers)
JEL-codes: E21 E27 E43 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:33:y:2015:i:c:p:208-222

DOI: 10.1016/j.jempfin.2015.03.013

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