Forecasting macroeconomy based on the term structure of credit spreads: evidence from China

Rongxi Zhou, Xianliang Wang and Guanqun Tong

Applied Economics Letters, 2013, vol. 20, issue 15, 1363-1367

Abstract: This article establishes an original methodology to forecast macroeconomy based on the term structure of credit spreads. It combines the traditional Svensson model with genetic algorithms to obtain the interest rate term structures of government bonds and corporate bonds and calculates credit spreads as their differences. And this article defines three factors of the term structure of credit spreads: level, slope and curvature. Based on these three factors and several macroeconomic variables, VAR models are developed and tested to forecast macroeconomic variables. The empirical results confirm that VAR models can predict the changes of China's macroeconomy well, which indicates that the term structure of credit spreads contains information of future changes of macroeconomic variables. We believe this result has significant implications for macroeconomy policy-makers.

Date: 2013
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DOI: 10.1080/13504851.2013.806778

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