51 Pages Posted: 4 Aug 2016 Last revised: 20 Jan 2017
Date Written: January 14, 2017
We study the information in the yield curve. We find that the exponential decay term λ in the Nelson-Siegel model, which governs factor loadings, is informative the yield curve shape change. λ jumps high and becomes volatile from around 24 months before recessions, but subdued afterwards. The predictive power of λ, on economic recessions and output growths, is stronger than that of the yield spread and lagged growth rate, at horizons between 3 and 36 months. We also find that the information contained in the yield curve shape dynamics encompasses that in the yield spread alone.
Keywords: Yield Curve, Term Structure, Nelson-Siegel Model, Economic Activity Forecasting, Forecast Combination
JEL Classification: G1; E4; C5
Suggested Citation: Suggested Citation