Asymmetry in the link between the yield spread and industrial production: threshold effects and forecasting

Ioannis Venetis (), David Peel and Ivan Paya ()

Journal of Forecasting, 2004, vol. 23, issue 5, 373-384

Abstract: 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.

Date: 2004
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Citations: View citations in EconPapers (5)

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Working Paper: ASYMMETRY IN THE LINK BETWEEN THE YIELD SPREAD AND INDUSTRIAL PRODUCTION. THRESHOLD EFFECTS AND FORECASTING (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:jof:jforec:v:23:y:2004:i:5:p:373-384

DOI: 10.1002/for.921

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