Do Eurozone yield spreads predict recessions?

Matthias Schock

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: An OLS and probit framework is used to examine the predictive power of yield spreads with respect to GDP growth and recessions in the Eurozone from the 1990s to the recent past. Credit default swap (CDS) data on sovereign bonds, which provide a direct measure of default risk, are employed as part of a new risk-adjustment method that significantly enhances the predictive accuracy of the yield-spread approach. The results show that the accuracy of predictions of growth and recessions using the commonly employed yield spread remains high, provided that biases associated with Eurozone sovereign default risk are accounted for.

Keywords: yield curve; CDS spreads; economic activity (search for similar items in EconPapers)
JEL-codes: E37 E43 E44 G1 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2014-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:han:dpaper:dp-532

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