Leverage as a Predictor for Real Activity and Volatility
ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)
affiliation not provided to SSRN
CEPR Discussion Paper No. DP8327
This paper explores the link between the leverage of the US financial sector, of households and of non-financial businesses, and real activity. We document that leverage is negatively correlated with the future growth of real activity, and positively linked to the conditional volatility of future real activity and of equity returns. The joint information in sectoral leverage series is more relevant for predicting future real activity than the information contained in any individual leverage series. Using in-sample regressions and out-of sample forecasts, we show that the predictive power of leverage is roughly comparable to that of macro and financial variables commonly used by forecasters. Leverage information would not have allowed to predict the Great Recession of 2008-2009 any better than conventional macro/financial predictors.
Number of Pages in PDF File: 31
Keywords: financial crisis, forecasts, leverage, real activity, volatility
JEL Classification: C53, E32, E37, G20working papers series
Date posted: April 18, 2011
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