Term Spread Volatility as a Leading Indicator of Economic Activity

Anastasios Megaritis, Dimitrios Bakas, Theodora Bermpei and Athanasios Triantafyllou ()
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Anastasios Megaritis: HUBS - Hull University Business School - University of Hull [United Kingdom]
Dimitrios Bakas: Nottingham Trent University
Theodora Bermpei: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - ULCO - Université du Littoral Côte d'Opale - Université de Lille - CNRS - Centre National de la Recherche Scientifique
Athanasios Triantafyllou: Audencia Business School

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Abstract: In this paper, we examine the macroeconomic predictive power of the volatility of the US Treasury yield curve slope (term spread volatility). Our forecasting exercise shows that US term spread volatility has significant predictive power for US industrial production and employment growth. The predictive power of term spread volatility is stronger at medium‐ and long‐term forecasting horizons and remains robust when well‐established predictors of economic activity, such as the term spread and stock market returns, are included. Our results also show that term spread volatility has statistically and economically distinct predictive power compared to other measures of economic uncertainty. Moreover, the predictive power of term spread volatility increases significantly after the 2008 Great Recession, indicating that the relationship between uncertainty about macroeconomic expectations and macroeconomic performance has strengthened in the post–Great Recession period. Finally, our out‐of‐sample forecasting results show that term spread volatility outperforms the term spread in forecasting economic activity over the longer term.

Keywords: volatility; term spread; forecasting; economic activity (search for similar items in EconPapers)
Date: 2026-08
New Economics Papers: this item is included in nep-fdg
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Published in Journal of Forecasting, 2026, 45 (5), pp.2332-2354. ⟨10.1002/for.70132⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05740995

DOI: 10.1002/for.70132

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