Yield Spreads as Predictors of Industrial Production: Expectations on Short Rates or Term Premia?

Posted: 15 Jan 2001

See all articles by Walid Hejazi

Walid Hejazi

University of Toronto - Rotman School of Management

Abstract

This paper reconsiders information in the US T-bill term structure for predicting movements in real monthly industrial production. It is shown that although T-bill spreads contain little or no predictive content, increases in term premia estimated from a GARCH-M model of the term structure do. Since these estimated premia are linear functions of the conditional variance of excess returns, the implication is that increases in interest rate variability are associated with reductions in industrial production. This evidence is robust to the inclusion of the spread between the 10-year T-bond yield and short-T-bill yields. The T-bill term structure therefore contains information which is independent of the long-end of the term structure.

Keywords: Term Structure, Time-Varying Term Premia, Industrial Production

JEL Classification: E43, E44

Suggested Citation

Hejazi, Walid, Yield Spreads as Predictors of Industrial Production: Expectations on Short Rates or Term Premia?. Applied Economics, Vol. 32, pp. 945-51, 2000. Available at SSRN: https://ssrn.com/abstract=241233

Walid Hejazi (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 287-7318 (Phone)

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