The Yield Curve Shape Dynamics and Real Economic Activity

51 Pages Posted: 4 Aug 2016 Last revised: 20 Jan 2017

Anqi Jiao

University of Alabama - Department of Economics, Finance and Legal Studies

Jun Ma

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: January 14, 2017

Abstract

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

Jiao, Anqi and Ma, Jun, The Yield Curve Shape Dynamics and Real Economic Activity (January 14, 2017). Available at SSRN: https://ssrn.com/abstract=2818055 or http://dx.doi.org/10.2139/ssrn.2818055

Anqi Jiao (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

Jun Ma

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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