Credit Spreads As Predictors Of Real Time Economic Activity

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Credit spreads as predictors of real-time economic activity : a Bayesian model-averaging approach

Author : Jon Faust
Publisher :
ISBN 13 :
Total Pages : 39 pages
Book Rating : 4.:/5 (731 download)

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Book Synopsis Credit spreads as predictors of real-time economic activity : a Bayesian model-averaging approach by : Jon Faust

Download or read book Credit spreads as predictors of real-time economic activity : a Bayesian model-averaging approach written by Jon Faust and published by . This book was released on 2011 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 â??distance-to-default.â?? 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., â??nowcastingâ??) 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 predictorsâ?"BMA consistently assigns a high posterior weight to models that include these financial indicators

Credit Spreads and Real Activity

Author : Philippe Mueller
Publisher :
ISBN 13 :
Total Pages : 72 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Credit Spreads and Real Activity by : Philippe Mueller

Download or read book Credit Spreads and Real Activity written by Philippe Mueller and published by . This book was released on 2011 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores the transmission of credit conditions into the real economy. Specifically, I examine the forecasting power of the term structure of credit spreads for future GDP growth. I find that the whole term structure of credit spreads has predictive power, while the term structure of Treasury yields has none. Using a parsimonious macro-finance term structure model that captures the joint dynamics of GDP, inflation, Treasury yields and credit spreads, I decompose the spreads and identify the drivers of this transmission effect. I show that there is a pure credit component orthogonal to macroeconomic information that accounts for a large part of the forecasting power of credit spreads. The macro factors themselves also contribute to the predictive power, especially for long maturity spreads. Additional factors affecting Treasury yields and credit spreads are irrelevant for predicting future economic activity. The credit factor is highly correlated with the index of tighter loan standards, thus lending support to the existence of a transmission channel from borrowing conditions to the economy. Using data from 2006-2008, I capture the ongoing crisis, during which credit conditions have heavily tightened and I show that the model provides reasonably accurate out-of-sample predictions for this period. As of year-end 2008, the model predicts a contraction of -2% in real GDP growth for 2009, which is lower than comparable survey forecasts.

Yield spreads as predictors of economic activity

Author : N. Kundan Kishor
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (731 download)

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Book Synopsis Yield spreads as predictors of economic activity by : N. Kundan Kishor

Download or read book Yield spreads as predictors of economic activity written by N. Kundan Kishor and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Interest Rate Spreads as Predictors of Real Economic Activity

Author : Randall Hounsell
Publisher :
ISBN 13 :
Total Pages : 138 pages
Book Rating : 4.:/5 (332 download)

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Book Synopsis Interest Rate Spreads as Predictors of Real Economic Activity by : Randall Hounsell

Download or read book Interest Rate Spreads as Predictors of Real Economic Activity written by Randall Hounsell and published by . This book was released on 1995 with total page 138 pages. Available in PDF, EPUB and Kindle. Book excerpt:

The Term Structure of Credit Spreads and the Economic Activity

Author :
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (631 download)

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Book Synopsis The Term Structure of Credit Spreads and the Economic Activity by :

Download or read book The Term Structure of Credit Spreads and the Economic Activity written by and published by . This book was released on with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B-rated corporate bonds in a doubly- stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables - indicators of real activity, inflation and financial conditions - as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs"!as a forward-looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs"!across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher- rated bonds.

Credit Spreads and Business Cycle Fluctuations

Author : Simon Gilchrist
Publisher :
ISBN 13 :
Total Pages : 35 pages
Book Rating : 4.:/5 (721 download)

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Book Synopsis Credit Spreads and Business Cycle Fluctuations by : Simon Gilchrist

Download or read book Credit Spreads and Business Cycle Fluctuations written by Simon Gilchrist and published by . This book was released on 2011 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: This paper examines the evidence on the relationship between credit spreads and economic activity. Using an extensive data set of prices of outstanding corporate bonds trading in the secondary market, we construct a credit spread index that isâ?"compared with the standard default-risk indicatorsâ?"a considerably more powerful predictor of economic activity. Using an empirical framework, we decompose our index into a predictable component that captures the available firm-specific information on expected defaults and a residual componentâ?"the excess bond premium. Our results indicate that the predictive content of credit spreads is due primarily to movements in the excess bond premium. Innovations in the excess bond premium that are orthogonal to the current state of the economy are shown to lead to significant declines in economic activity and equity prices. We also show that during the 2007â??09 financial crisis, a deterioration in the creditworthiness of broker-dealersâ?"key financial intermediaries in the corporate cash marketâ?"led to an increase in the excess bond premium. These find- ings support the notion that a rise in the excess bond premium represents a reduction in the effective risk-bearing capacity of the financial sector and, as a result, a contraction in the supply of credit with significant adverse consequences for the macroeconomy.

Credit spreads and business cycle fluctuations

Author : Simon Gilchrist
Publisher :
ISBN 13 :
Total Pages : 35 pages
Book Rating : 4.:/5 (732 download)

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Book Synopsis Credit spreads and business cycle fluctuations by : Simon Gilchrist

Download or read book Credit spreads and business cycle fluctuations written by Simon Gilchrist and published by . This book was released on 2011 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: This paper examines the evidence on the relationship between credit spreads and economic activity. Using an extensive data set of prices of outstanding corporate bonds trading in the secondary market, we construct a credit spread index that isâ?"compared with the standard default-risk indicatorsâ?"a considerably more powerful predictor of economic activity. Using an empirical framework, we decompose our index into a predictable component that captures the available firm-specific information on expected defaults and a residual componentâ?"the excess bond premium. Our results indicate that the predictive content of credit spreads is due primarily to movements in the excess bond premium. Innovations in the excess bond premium that are orthogonal to the current state of the economy are shown to lead to significant declines in economic activity and equity prices. We also show that during the 2007â??09 financial crisis, a deterioration in the creditworthiness of broker-dealersâ?"key financial intermediaries in the corporate cash marketâ?"led to an increase in the excess bond premium. These find- ings support the notion that a rise in the excess bond premium represents a reduction in the effective risk-bearing capacity of the financial sector and, as a result, a contraction in the supply of credit with significant adverse consequences for the macroeconomy.

Credit market shocks and economic fluctuations : evidence from corporate bond and stock markets

Author : Simon Gilchrist
Publisher :
ISBN 13 :
Total Pages : 49 pages
Book Rating : 4.:/5 (34 download)

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Book Synopsis Credit market shocks and economic fluctuations : evidence from corporate bond and stock markets by : Simon Gilchrist

Download or read book Credit market shocks and economic fluctuations : evidence from corporate bond and stock markets written by Simon Gilchrist and published by . This book was released on 2009 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our "ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform---especially at longer horizons---standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30~percent of the forecast error variance in economic activity at the two- to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S.\ economic fluctuations during the 1990--2008 period.

An Explanation of Spread's Ability to Predict Economic Activity

Author : Anastasios Evgenidis
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis An Explanation of Spread's Ability to Predict Economic Activity by : Anastasios Evgenidis

Download or read book An Explanation of Spread's Ability to Predict Economic Activity written by Anastasios Evgenidis and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study contributes to the relevant literature by providing an explanation on the reason and the economic conditions under which the spread proves to be such a powerful predictor of economic activity. For over two decades numerous studies have provided evidence on the predictive ability of the yield spread for real economic growth. While all this large literature has focused on how well the spread helps towards predicting real activity, none of these studies has given an answer on why the spread predicts. This study deals with this issue by attempting to find an answer on the reason and the economic conditions under which the spread proves to be such a powerful predictor of economic activity. We examine whether the explanation of spread's predictive ability lies behind interest rate volatility, supposing that the economy oscillates between high and low volatility regimes. For this reason we nest GARCH models into Markov regime switching models.When we assume that the economy simply oscillates between different regimes, interest rate volatility does not explain the spread's predictive ability. However, we obtain a very interesting result when we augment the conditional variance with a level effects term. This ensures that in an environment with high levels of interest rates - in which the rational agents expect the economy to slow down - there is a greater possibility for the economy to switch to a high volatility regime. Under these economic conditions, interest rate volatility appears to be the reason of spread's predictive power from one up to three years.

Credit Market Shocks and Economic Fluctuations

Author : Simon Gilchrist
Publisher :
ISBN 13 :
Total Pages : 49 pages
Book Rating : 4.:/5 (12 download)

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Book Synopsis Credit Market Shocks and Economic Fluctuations by : Simon Gilchrist

Download or read book Credit Market Shocks and Economic Fluctuations written by Simon Gilchrist and published by . This book was released on 2009 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our "ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform---especially at longer horizons---standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30~percent of the forecast error variance in economic activity at the two- to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S.\ economic fluctuations during the 1990--2008 period.

Forecasting Future Economic Growth

Author : Maria Khait
Publisher :
ISBN 13 :
Total Pages : 52 pages
Book Rating : 4.:/5 (88 download)

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Book Synopsis Forecasting Future Economic Growth by : Maria Khait

Download or read book Forecasting Future Economic Growth written by Maria Khait and published by . This book was released on 2012 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: The broad literature documents the empirical regularity that slope of the term structure of interest rates is a reliable predictor of future real economic activity. Steeper slopes presage increasing growth, and downward sloping term structures presage declining growth or even recession. Some instances of slope's misleading signals were recorded in 2006 (the term structure was flat, indicating decline in economic activity when high growth continued) and 2008 (the term structure was very steep, predicting economic growth when recession continued and took a deep dive). Moreover, Breeden (2012a) showed that the term structure of interest rates has had less predictive power over the past fifty years than has been found in earlier researches over shorter periods of time. The key idea underlying this paper was to test whether the term structure of volatility and the term structure of inflation combined with the term spread could improve predictions of future economic growth compared to interest rate based forecasts with only one variable. This study finds that while the term structure spread and volatility appear to be statistically significant variables there is little evidence of improved performance compare to interest rate based forecasts with only one variable.

Credit Spreads, Economic Activity and Fragmentation

Author : Roberto A. De Santis
Publisher :
ISBN 13 :
Total Pages : 76 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Credit Spreads, Economic Activity and Fragmentation by : Roberto A. De Santis

Download or read book Credit Spreads, Economic Activity and Fragmentation written by Roberto A. De Santis and published by . This book was released on 2016 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit spreads may be jointly driven by developments that are orthogonal to the current state of the economy. We show that this unobserved systematic component is demanded to hedge against adverse economic fluctuations. Using either yield-to-maturity spreads or asset swap spreads for 2345 Eurobonds across euro area non-financial industries, we estimate a market wide relative excess bond premium - a function of the unobserved systematic component, which can predict real economic activity, the stock market and survey-based economic sentiment. This premium was highly negative between March 2003 and June 2007 in all bond segments and turned positive since then up to the launch of the 3-years long term refinancing operations in December 2011, predicting the financial crisis and the two recessions. Finally, using the countries' excess bond premia, we find that fragmentation risk increased sharply after Lehmans bankruptcy and during the sovereign debt crisis.

Understanding Inflation and the Implications for Monetary Policy

Author : Jeff Fuhrer
Publisher : MIT Press
ISBN 13 : 026225820X
Total Pages : 517 pages
Book Rating : 4.2/5 (622 download)

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Book Synopsis Understanding Inflation and the Implications for Monetary Policy by : Jeff Fuhrer

Download or read book Understanding Inflation and the Implications for Monetary Policy written by Jeff Fuhrer and published by MIT Press. This book was released on 2009-09-11 with total page 517 pages. Available in PDF, EPUB and Kindle. Book excerpt: Current perspectives on the Phillips curve, a core macroeconomic concept that treats the relationship between inflation and unemployment. In 1958, economist A. W. Phillips published an article describing what he observed to be the inverse relationship between inflation and unemployment; subsequently, the “Phillips curve” became a central concept in macroeconomic analysis and policymaking. But today's Phillips curve is not the same as the original one from fifty years ago; the economy, our understanding of price setting behavior, the determinants of inflation, and the role of monetary policy have evolved significantly since then. In this book, some of the top economists working today reexamine the theoretical and empirical validity of the Phillips curve in its more recent specifications. The contributors consider such questions as what economists have learned about price and wage setting and inflation expectations that would improve the way we use and formulate the Phillips curve, what the Phillips curve approach can teach us about inflation dynamics, and how these lessons can be applied to improving the conduct of monetary policy. Contributors Lawrence Ball, Ben Bernanke, Oliver Blanchard, V. V. Chari, William T. Dickens, Stanley Fischer, Jeff Fuhrer, Jordi Gali, Michael T. Kiley, Robert G. King, Donald L. Kohn, Yolanda K. Kodrzycki, Jane Sneddon Little, Bartisz Mackowiak, N. Gregory Mankiw, Virgiliu Midrigan, Giovanni P. Olivei, Athanasios Orphanides, Adrian R. Pagan, Christopher A. Pissarides, Lucrezia Reichlin, Paul A. Samuelson, Christopher A. Sims, Frank R. Smets, Robert M. Solow, Jürgen Stark, James H. Stock, Lars E. O. Svensson, John B. Taylor, Mark W. Watson

Macroeconomic Fluctuations and Policies

Author : Edouard Challe
Publisher : MIT Press
ISBN 13 : 0262549298
Total Pages : 361 pages
Book Rating : 4.2/5 (625 download)

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Book Synopsis Macroeconomic Fluctuations and Policies by : Edouard Challe

Download or read book Macroeconomic Fluctuations and Policies written by Edouard Challe and published by MIT Press. This book was released on 2023-09-19 with total page 361 pages. Available in PDF, EPUB and Kindle. Book excerpt: The basic tools for analyzing macroeconomic fluctuations and policies, applied to concrete issues and presented within an integrated New Keynesian framework. This textbook presents the basic tools for analyzing macroeconomic fluctuations and policies and applies them to contemporary issues. It employs a unified New Keynesian framework for understanding business cycles, major crises, and macroeconomic policies, introducing students to the approach most often used in academic macroeconomic analysis and by central banks and international institutions. The book addresses such topics as how recessions and crises spread; what instruments central banks and governments have to stimulate activity when private demand is weak; and what “unconventional” macroeconomic policies might work when conventional monetary policy loses its effectiveness (as has happened in many countries in the aftermath of the Great Recession.). The text introduces the foundations of modern business cycle theory through the notions of aggregate demand and aggregate supply, and then applies the theory to the study of regular business-cycle fluctuations in output, inflation, and employment. It considers conventional monetary and fiscal policies aimed at stabilizing the business cycle, and examines unconventional macroeconomic policies, including forward guidance and quantitative easing, in situations of “liquidity trap”—deep crises in which conventional policies are either ineffective or have very different effects than in normal time. This book is the first to use the New Keynesian framework at the advanced undergraduate level, connecting undergraduate learning not only with the more advanced tools taught at the graduate level but also with the large body of policy-oriented research in academic journals. End-of-chapter problems help students master the materials presented.

The Cyclical Behavior of the Term Structure of Interest Rates

Author : Reuben A. Kessel
Publisher :
ISBN 13 :
Total Pages : 132 pages
Book Rating : 4.3/5 (97 download)

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Book Synopsis The Cyclical Behavior of the Term Structure of Interest Rates by : Reuben A. Kessel

Download or read book The Cyclical Behavior of the Term Structure of Interest Rates written by Reuben A. Kessel and published by . This book was released on 1965 with total page 132 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Dynamic Factor Models

Author : Siem Jan Koopman
Publisher : Emerald Group Publishing
ISBN 13 : 1785603523
Total Pages : 685 pages
Book Rating : 4.7/5 (856 download)

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Book Synopsis Dynamic Factor Models by : Siem Jan Koopman

Download or read book Dynamic Factor Models written by Siem Jan Koopman and published by Emerald Group Publishing. This book was released on 2016-01-08 with total page 685 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume explores dynamic factor model specification, asymptotic and finite-sample behavior of parameter estimators, identification, frequentist and Bayesian estimation of the corresponding state space models, and applications.

The Inflation-Targeting Debate

Author : Ben S. Bernanke
Publisher : University of Chicago Press
ISBN 13 : 0226044734
Total Pages : 469 pages
Book Rating : 4.2/5 (26 download)

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Book Synopsis The Inflation-Targeting Debate by : Ben S. Bernanke

Download or read book The Inflation-Targeting Debate written by Ben S. Bernanke and published by University of Chicago Press. This book was released on 2007-11-01 with total page 469 pages. Available in PDF, EPUB and Kindle. Book excerpt: Over the past fifteen years, a significant number of industrialized and middle-income countries have adopted inflation targeting as a framework for monetary policymaking. As the name suggests, in such inflation-targeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. While the objective of controlling inflation enjoys wide support among both academic experts and policymakers, and while the countries that have followed this model have generally experienced good macroeconomic outcomes, many important questions about inflation targeting remain. In Inflation Targeting, a distinguished group of contributors explores the many underexamined dimensions of inflation targeting—its potential, its successes, and its limitations—from both a theoretical and an empirical standpoint, and for both developed and emerging economies. The volume opens with a discussion of the optimal formulation of inflation-targeting policy and continues with a debate about the desirability of such a model for the United States. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the Czech Republic, Poland, and Hungary.