Downturns and Changes in the Yield Slope

29 Pages Posted: 2 Oct 2018 Last revised: 17 Oct 2018

See all articles by Mirko Abbritti

Mirko Abbritti

University of Navarra

Juan Equiza-Goni

University of Navarra

Antonio Moreno

School of Economics and Business, University of Navarra

Tommaso Trani

University of Navarra - School of Economics

Date Written: September 8, 2018

Abstract

We show that the slope of the sovereign yield curve not only predicts future economic activity through its level but also through its changes. Our results with US data show that the inclusion of the first difference of the slope in the traditional yield slope regressions significantly increases the explanatory power of the yield curve. Decomposing the yield slope changes into those of the risk-neutral spread and of the term premium also brings insights into future economic activity forecast. We find that, while positive changes to the risk-neutral spread predict lower economic activity in the short-run (1-3 months), positive changes to the term premium predict lower economic activity in the medium run (3-12 months). These results are obtained at both monthly (industrial production, unemployment) and quarterly (GDP growth, unemployment) frequencies and also in probit-type recession regressions.

Keywords: yield curve, yield slope, term premium, risk-neutral spread, predictive power, economic activity, recessions, monetary policy

JEL Classification: E43, E44, E47

Suggested Citation

Abbritti, Mirko and Equiza-Goni, Juan and Moreno, Antonio and Trani, Tommaso, Downturns and Changes in the Yield Slope (September 8, 2018). Available at SSRN: https://ssrn.com/abstract=3246408 or http://dx.doi.org/10.2139/ssrn.3246408

Mirko Abbritti

University of Navarra ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

Juan Equiza-Goni

University of Navarra ( email )

Camino del Cerro del Aguila, 3
Pamplona, Navarra 31080
Spain

Antonio Moreno (Contact Author)

School of Economics and Business, University of Navarra ( email )

Ed. Amigos
Pamplona, Navarra 31009
Spain

Tommaso Trani

University of Navarra - School of Economics ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

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