Improving the Predictive Power of Spreads for Economic Activity: Decomposition Methods

Chang Min Lee () and Hahn Lee ()
Additional contact information
Chang Min Lee: seoul national universtiy

No 2503528, Proceedings of International Academic Conferences from International Institute of Social and Economic Sciences

Abstract: In this paper, we examine whether and to what extent the predictive power of credit and/or term spreads for real economic activity can be enhanced by using additional information via decomposition. In doing so, we first apply the wavelet analysis to present evidence that the business-cycle component of the credit spread can better predict the probability of a recession than the usual time-domain analysis. In particular, we investigate the predictive power of the credit spread, given the recent empirical findings that it has a useful explanatory power for future economic fluctuations. We suggest that the wavelet decomposition can enhance the predictive power of the credit spread compared to the usual regression model. We also consider a decomposition of the term spread into the expectations effect and the term premium, based on the liquidity premium theory, and discuss evidence that the decomposition might lead to a better prediction for business-cycle fluctuations than the usual term spread.

Keywords: Credit Spread; Business Cycle; Wavelet Decomposition; Liquidity premium theory (search for similar items in EconPapers)
JEL-codes: C25 E32 E43 (search for similar items in EconPapers)
Pages: 1 page
Date: 2015-06
New Economics Papers: this item is included in nep-mac and nep-ore
References: Add references at CitEc
Citations:

Published in Proceedings of the Proceedings of the 16th International Academic Conference, Amsterdam, Jun 2015, pages 307-307

Downloads: (external link)
https://iises.net/proceedings/16th-international-a ... =25&iid=045&rid=3528 First version, 2015

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sek:iacpro:2503528

Access Statistics for this paper

More papers in Proceedings of International Academic Conferences from International Institute of Social and Economic Sciences
Bibliographic data for series maintained by Klara Cermakova ().