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Yield Spreads (yield + spread)
Selected AbstractsDoes the Yield Spread Predict Recessions in the Euro Area?,INTERNATIONAL FINANCE, Issue 2 2005Fabio MonetaArticle first published online: 16 DEC 200 This paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area and provides evidence of the potential usefulness of this indicator for monetary policy purposes. In particular, the historical predictive power of ten variations of yield spreads, for different segments of the yield curve, is tested using a probit model. The yield spread between the ten-year government bond rate and the three-month interbank rate outperforms all other spreads in predicting recessions in the euro area. The forecast accuracy of the spread between ten-year and three-month interest rates is also explored in an exercise of out-of-sample forecasting. This yield spread appears to contain information beyond that already available in the history of output, and to outperform other competitor indicators. [source] Economic Sentiment and Yield Spreads in EuropeEUROPEAN FINANCIAL MANAGEMENT, Issue 2 2008Eva Ferreira G12; E43 Abstract According toHarvey (1988), the forecasting ability of the term spread on economic growth is due to the fact that interest rates reflect investors' expectations about the future economic situation when deciding their plans for consumption and investment. Past literature has used ex post data on output or consumption growth as proxies for their expected value. In this paper, we employ a direct measure of economic agents' expectations, the Economic Sentiment Indicator elaborated by the European Commission, to test this hypothesis. Our results indicate that a linear combination of European yield spreads explains a surprising 93.7\% of the variability of the Economic Sentiment Indicator. This ability of yield spreads to capture economic agent expectations may be the actual reason for the predictive power of yield spreads about future business cycle. [source] The term structure of interest rates and the Mexican economyCONTEMPORARY ECONOMIC POLICY, Issue 3 2000JG. Gonzalez Can the yield spread, which has been found to predict with surprising accuracy the movement of key macroeconomic variables of developed countries, also predict such variables for a developing country experiencing economic turmoil? This article presents empirical results that suggest significant forecasting ability for the yield spread for segments of the Mexican economy during the 1995,1997 period of economic volatility. The actual and predicted variable changes sometimes conflict with those experienced by developed countries in part because of the unusually close relationship between the Mexican Treasury and the Banco de México. Consequently, analysts and policy officials may exploit the forecast potential of the yield spread, but only in the context of evolving institutional considerations. [source] A Required Yield Theory of Stock Market Valuation and Treasury Yield DeterminationFINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 1 2009Christophe Faugère Stock market valuation and Treasury yield determination are consistent with the Fisher effect (1896) as generalized by Darby (1975) and Feldstein (1976). The U.S. stock market (S&P 500) is priced to yield ex-ante a real after-tax return directly related to real long-term GDP/capita growth (the required yield). Elements of our theory show that: (1) real after-tax Treasury and S&P 500 forward earnings yields are stationary processes around positive means; (2) the stock market is indeed priced as the present value of expected dividends with the proviso that investors are expecting fast mean reversion of the S&P 500 nominal growth opportunities to zero. Moreover, (3) the equity premium is mostly due to business cycle risk and is a direct function of below trend expected productivity, where productivity is measured by the growth in book value of S&P 500 equity per-share. Inflation and fear-based risk premia only have a secondary impact on the premium. The premium is always positive or zero with respect to long-term Treasuries. It may be negative for short-term Treasuries when short-term productivity outpaces medium and long run trends. Consequently: (4) Treasury yields are mostly determined in reference to the required yield and the business cycle risk premium; (5) the yield spread is largely explained by the differential of long-term book value per share growth vs. near term growth, with possible yield curve inversions. Finally, (6) the Fed model is partially validated since both the S&P 500 forward earnings yield and the ten-year Treasury yield are determined by a common factor: the required yield. [source] Does the Yield Spread Predict Recessions in the Euro Area?,INTERNATIONAL FINANCE, Issue 2 2005Fabio MonetaArticle first published online: 16 DEC 200 This paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area and provides evidence of the potential usefulness of this indicator for monetary policy purposes. In particular, the historical predictive power of ten variations of yield spreads, for different segments of the yield curve, is tested using a probit model. The yield spread between the ten-year government bond rate and the three-month interbank rate outperforms all other spreads in predicting recessions in the euro area. The forecast accuracy of the spread between ten-year and three-month interest rates is also explored in an exercise of out-of-sample forecasting. This yield spread appears to contain information beyond that already available in the history of output, and to outperform other competitor indicators. [source] Asymmetry in the link between the yield spread and industrial production: threshold effects and forecastingJOURNAL OF FORECASTING, Issue 5 2004Ivan Paya Abstract We analyse the nonlinear behaviour of the information content in the spread for future real economic activity. The spread linearly predicts one-year-ahead real growth in nine industrial production sectors of the USA and four of the UK over the last 40 years. However, recent investigations on the spread,real activity relation have questioned both its linear nature and its time-invariant framework. Our in-sample empirical evidence suggests that the spread,real activity relationship exhibits asymmetries that allow for different predictive power of the spread when past spread values were above or below some threshold value. We then measure the out-of-sample forecast performance of the nonlinear model using predictive accuracy tests. The results show that significant improvement in forecasting accuracy, at least for one-step-ahead forecasts, can be obtained over the linear model. Copyright © 2004 John Wiley & Sons, Ltd. [source] Probit model forecasts of national and state manufacturing and construction employment downturns*PAPERS IN REGIONAL SCIENCE, Issue 4 2005Gary L. Shoesmith Probit modeling; business cycles; leading indicators; yield spreads Abstract., This study extends Shoesmith (2003) by generating probit model forecasts of downturns in national and state manufacturing and construction employment, using average weekly hours in manufacturing (HRS) and housing permits (HP), respectively, as explanatory variables. In each case the yield spread (SPREAD) is used as an alternative to HRS or HP. The expected result is that HRS and HP are more effective than SPREAD in forecasting downturns in related sectors of employment. However, the estimation and forecast results for the nation and 50 states show that SPREAD is in general more useful than HRS and HP, primarily because of the short lead times provided by the leading indicators. [source] Modelling the Credit Spreads and Long,Term Relationships of Thai Yankee Bond IssuesASIAN ECONOMIC JOURNAL, Issue 4 2002Jonathan Batten The present study investigates the yield spread between Thai government bonds issued in the US domestic market (,Yankee' bonds) and US Treasury bonds, to determine the long,term equilibrium dynamics and the factors that affect changes in credit spreads. The sample period investigated was from May 5, 1999 to March 26, 2002. The results suggest that the long,term equilibrium relationship holds only between Thai Yankee bonds and long,term US bonds, rather than shorter or equivalent maturity bonds. Also, changes in the credit spreads of Thai Yankee bonds are generally negatively related to changes in the Stock Exchange of Thailand (SET) index (see http://www.set.or.th/th/index.html). Changes in US Treasury bonds also tend to negatively affect spreads on short Thai Yankee bonds and positively affect spreads on long Thai Yankee bonds, although other macroeconomic factors , including exchange rate and capital flow variables , were generally not important. [source] Economic Sentiment and Yield Spreads in EuropeEUROPEAN FINANCIAL MANAGEMENT, Issue 2 2008Eva Ferreira G12; E43 Abstract According toHarvey (1988), the forecasting ability of the term spread on economic growth is due to the fact that interest rates reflect investors' expectations about the future economic situation when deciding their plans for consumption and investment. Past literature has used ex post data on output or consumption growth as proxies for their expected value. In this paper, we employ a direct measure of economic agents' expectations, the Economic Sentiment Indicator elaborated by the European Commission, to test this hypothesis. Our results indicate that a linear combination of European yield spreads explains a surprising 93.7\% of the variability of the Economic Sentiment Indicator. This ability of yield spreads to capture economic agent expectations may be the actual reason for the predictive power of yield spreads about future business cycle. [source] Does the Yield Spread Predict Recessions in the Euro Area?,INTERNATIONAL FINANCE, Issue 2 2005Fabio MonetaArticle first published online: 16 DEC 200 This paper studies the informational content of the slope of the yield curve as a predictor of recessions in the euro area and provides evidence of the potential usefulness of this indicator for monetary policy purposes. In particular, the historical predictive power of ten variations of yield spreads, for different segments of the yield curve, is tested using a probit model. The yield spread between the ten-year government bond rate and the three-month interbank rate outperforms all other spreads in predicting recessions in the euro area. The forecast accuracy of the spread between ten-year and three-month interest rates is also explored in an exercise of out-of-sample forecasting. This yield spread appears to contain information beyond that already available in the history of output, and to outperform other competitor indicators. [source] The behavior of emerging market sovereigns' credit default swap premiums and bond yield spreadsINTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 1 2010Michael Adler Abstract We test whether credit risk for Emerging Market Sovereigns is priced equally in the credit default swap (CDS) and bond markets. The parity relationship between CDS premiums and bond yield spreads (BYS), that was tested and largely confirmed in the literature, is mostly rejected. Prices below par can result in positive basis, i.e. CDS premiums that are greater than BYS and vice versa. To adjust for the non-par price, we construct the BYS implied by the term structure of CDS premiums for various maturities. We are able to restore the parity relation and confirm the equivalence of credit risk pricing in the CDS and bond markets for many countries that have bonds with non-par prices and time varying credit quality. We detect non-parity even after the adjustment mainly in countries in Latin America, where the bases are larger than the bid,ask spreads in the market. We also find that the repo rates of bonds decrease around episodes of credit quality deterioration, which helps the basis remain positive. Copyright © 2009 John Wiley & Sons, Ltd. [source] Cross-Border Bank M&As and Risk: Evidence from the Bond MarketJOURNAL OF MONEY, CREDIT AND BANKING, Issue 4 2010SUNGHO CHOI bank risk; cross-border; M&A; yield spreads The impact of cross-border bank M&As on bank risk remains an open question. Though geographically diversifying bank M&As have the potential to reduce the risk of bank insolvency, they also have the potential to increase that risk due to the increase in risk-taking incentives by bank managers and stockholders following these transactions. This paper empirically investigates whether cross-border bank M&As increase or decrease the risk of acquiring banks as captured by changes in acquirers' yield spreads. This paper also investigates how differences in the institutional environments between bidder and target countries affect changes in yield spreads following M&A announcements. The study finds that bondholders, in general, perceive cross-border bank M&As as risk-increasing activities, unlike domestic bank mergers. Specifically, on average, yield spreads increase by 4.13 basis points following the announcement of cross-border M&As. This study also finds that these yield spreads are significantly affected by the differences in investor-protection and deposit insurance environments between the transacting countries. However, the study does not find that the regulatory and supervisory environment in the home countries of the transacting parties significantly affects the changes in yield spreads. The overall evidence suggests that regulators should judge the relative environment in both the home and the host countries in evaluating the associated risks of an active multinational financial institution and in setting the sufficiency of the banks' reserve positions. [source] Probit model forecasts of national and state manufacturing and construction employment downturns*PAPERS IN REGIONAL SCIENCE, Issue 4 2005Gary L. Shoesmith Probit modeling; business cycles; leading indicators; yield spreads Abstract., This study extends Shoesmith (2003) by generating probit model forecasts of downturns in national and state manufacturing and construction employment, using average weekly hours in manufacturing (HRS) and housing permits (HP), respectively, as explanatory variables. In each case the yield spread (SPREAD) is used as an alternative to HRS or HP. The expected result is that HRS and HP are more effective than SPREAD in forecasting downturns in related sectors of employment. However, the estimation and forecast results for the nation and 50 states show that SPREAD is in general more useful than HRS and HP, primarily because of the short lead times provided by the leading indicators. [source] Determinants of Japanese Yen interest rate swap spreads: Evidence from a smooth transition vector autoregressive modelTHE JOURNAL OF FUTURES MARKETS, Issue 1 2008Ying Huang This study investigates the determinants of variations in the yield spreads between Japanese yen interest rate swaps and Japan government bonds for a period from 1997 to 2005. A smooth transition vector autoregressive (STVAR) model and generalized impulse response functions are used to analyze the impact of various economic shocks on swap spreads. The volatility based on a GARCH (generalized autoregressive conditional heteroskedasticity) model of the government bond rate is identified as the transition variable that controls the smooth transition from a high volatility regime to a low volatility regime. The break point of the regime shift occurs around the end of the Japanese banking crisis. The impact of economic shocks on swap spreads varies across the maturity of swap spreads as well as regimes. Overall, swap spreads are more responsive to the economic shocks in the high volatility regime. Moreover, a volatility shock has profound effects on shorter maturity spreads, whereas the term structure shock plays an important role in impacting longer maturity spreads. Results of this study also show noticeable differences between the nonlinear and linear impulse response functions. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:82,107, 2008 [source] | ||||||||||||||||||||||