Do Term Premia Affect the Predictive Power of the German Yield Curve for Future Economic Activity?
24 Pages Posted: 23 Jul 2007
Date Written: September 26, 2006
Abstract
This paper presents and further analyses estimated term premia for Germany as the largest euro area country. The term premia are estimated within an affine arbitrage-free term structure model with two latent factors. Survey data help anchor model-implied long-horizon expectations for interest rates which have a large bearing on estimated term premia at the long-end of the yield curve in particular. The results suggest that term premia embedded in long-term interest rates displayed some cyclical variations over time. Moreover, term premia experienced a trend decline over the sample considered (1973 to 2006), but in particular since the mid-1990s. Hence, it may principally be important to take term premia developments explicitly into account when assessing the information content of the yield curve for future economic conditions or market expectations of future short-term interest rates, for example. This paper analyses empirically whether and to which extent term premia affected the predictive power of the slope of the yield curve for economic activity in Germany.
Keywords: Yield curve, Term structure, Forecasting, Term premia, Financial markets and the macroeconomy
JEL Classification: E32, E43, E44, E47
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
New Indexes of Coincident and Leading Economic Indicators
By James H. Stock and Mark W. Watson
-
Forecasting Output and Inflation: The Role of Asset Prices
By James H. Stock and Mark W. Watson
-
Predicting U.S. Recessions: Financial Variables as Leading Indicators
-
A Multi-Country Comparison of Term Structure Forecasts at Long Horizons
-
On the Predictive Power of Interest Rates and Interest Rate Spreads
-
Why Does the Paper-Bill Spread Predict Real Economic Activity?
-
A Re-Examination of the Predictability of Economic Activity Using the Yield Spread
By James D. Hamilton and Dong Heon Kim
-
A Re-Examination of the Predictability of Economic Activity Using the Yield Spread
By James D. Hamilton and Dong Heon Kim
-
The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications
By Mark Gertler and Cara S. Lown
-
The Predictive Content of the Interest Rate Term Spread for Future Economic Growth