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Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach

Jon Faust (), Simon Gilchrist (), Jonathan Wright and Egon Zakrajsek ()

No 16725, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Employing a large number of real and financial indicators, we use Bayesian Model Averaging (BMA) to forecast real-time measures of economic activity. Importantly, the predictor set includes option-adjusted credit spread indexes based on bond portfolios sorted by maturity and credit risk as measured by the issuer's "distance-to-default." The portfolios are constructed directly from the secondary market prices of outstanding senior unsecured bonds issued by a large number of U.S. corporations. Our results indicate that relative to an autoregressive benchmark, BMA yields consistent improvements in the prediction of the growth rates of real GDP, business fixed investment, industrial production, and employment, as well as of the changes in the unemployment rate, at horizons from the current quarter (i.e., "nowcasting") out to four quarters hence. The gains in forecast accuracy are statistically significant and economically important and owe exclusively to the inclusion of our portfolio credit spreads in the set of predictors--BMA consistently assigns a high posterior weight to models that include these financial indicators.

JEL-codes: C11 C53 (search for similar items in EconPapers)
Date: 2011-01
Note: ME
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Published as Jon Faust & Simon Gilchrist & Jonathan H. Wright & Egon Zakrajšsek, 2013. "Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1501-1519, December.

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Journal Article: Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach (2013) Downloads
Working Paper: Credit spreads as predictors of real-time economic activity: a Bayesian Model-Averaging approach (2012) Downloads
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