The yield spread puzzle and the information content of SPF forecasts

Kajal Lahiri, George Monokroussos and Yongchen Zhao

Discussion Papers from University at Albany, SUNY, Department of Economics

Abstract: While the yield spread has long been recognized as a good predictor of recessions, it seems to have been largely overlooked by professional forecasters. We examine this puzzle, established by Rudebusch and Williams (2009), in a data-rich environment including not just the yield spread but many other predictors as well. We confirm the puzzle in this context by examining the contributions of both the SPF forecasts and the yield spread in predicting recessions, and by examining the information content of SPF forecasts directly. Furthermore, we take the first step towards a possible resolution of this puzzle by recognizing the heterogeneity across professional forecasters.

Date: 2012
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Related works:
Journal Article: The yield spread puzzle and the information content of SPF forecasts (2013)
Working Paper: The Yield Spread Puzzle and the Information Content of SPF Forecasts (2012)
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