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

52 Pages Posted: 8 Jan 2013

See all articles by Jon Faust

Jon Faust

Board of Governors of the Federal Reserve - Division of International Finance; Johns Hopkins University

Simon Gilchrist

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Egon Zakrajsek

Federal Reserve Board - Division of Monetary Affairs

Multiple version iconThere are 2 versions of this paper

Date Written: October 23, 2012

Abstract

Employing a large number of financial indicators, we use Bayesian Model Averaging (BMA) to forecast real-time measures of economic activity. The indicators include credit spreads based on portfolios -- constructed directly from the secondary market prices of outstanding bonds -- sorted by maturity and credit risk. Relative to an autoregressive benchmark, BMA yields consistent improvements in the prediction of the cyclically-sensitive measures of economic activity at horizons from the current quarter out to four quarters hence. The gains in forecast accuracy are statistically significant and economically important and owe almost exclusively to the inclusion of credit spreads in the set of predictors.

Keywords: Forecasting, real-time data, Bayesian Model Averaging, credit spreads

JEL Classification: C11, C53

Suggested Citation

Faust, Jon and Gilchrist, Simon and Wright, Jonathan H. and Zakrajsek, Egon, Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach (October 23, 2012). FEDS Working Paper No. 2012-77. Available at SSRN: https://ssrn.com/abstract=2197492 or http://dx.doi.org/10.2139/ssrn.2197492

Jon Faust

Board of Governors of the Federal Reserve - Division of International Finance ( email )

20th St. and Constitution Ave.
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Johns Hopkins University

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United States

Simon Gilchrist

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

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Baltimore, MD 21218-2685
United States

Egon Zakrajsek (Contact Author)

Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-728-5864 (Phone)
202-452-3819 (Fax)

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