The yield curve as a predictor of economic activity - the case of Germany, Great Britain and France

Result code in IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F00216224%3A14560%2F19%3A00111186" target="_blank" >RIV/00216224:14560/19:00111186 - isvavai.cz</a>

Result on the web

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DOI - Digital Object Identifier

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Result language

čeština

Original language name

The yield curve as a predictor of economic activity - the case of Germany, Great Britain and France

Original language description

In this paper we study the ability of the yield curve to predict GDP activity in Germany, France and Great Britain. The dataset contains the spread between 10-year and 3-month sovereign bonds and real GDP of the countries mentioned above between the years 2000 and 2018. The natural and probably the most popular measure of economic growth is GDP growth, taken quarterly. The steepness of the bond yield curve should be an excellent indicator of a possible future economic activity. A rise in the short rate tends to flatten the yield curve as well as to slow down real growth the near term. The relationship between the spread and future GDP activity was proved already before. The results showed that the prediction of the GDP growth or decrease was proven after year 2008 (the financial crisis) in all mentioned countries, the predictive power of the yield curve was lowered before the year 2008. Certainly the simple yield curve growth forecast should not serve as a replacement for the complex predictive models, it does, however, provide enough information to serve as a useful check on the more sophisticated forecasts. The results showed that the best predictive lag is a lag of five quarters. The theory says that it should be lag of four quarters. The results presented also confirm that 10-year and 3-month yield spread has significant predictive power for real GDP growth after financial crisis. These findings provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity. These findings might be beneficial for investors and provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity.

Czech name

The yield curve as a predictor of economic activity - the case of Germany, Great Britain and France

Czech description

In this paper we study the ability of the yield curve to predict GDP activity in Germany, France and Great Britain. The dataset contains the spread between 10-year and 3-month sovereign bonds and real GDP of the countries mentioned above between the years 2000 and 2018. The natural and probably the most popular measure of economic growth is GDP growth, taken quarterly. The steepness of the bond yield curve should be an excellent indicator of a possible future economic activity. A rise in the short rate tends to flatten the yield curve as well as to slow down real growth the near term. The relationship between the spread and future GDP activity was proved already before. The results showed that the prediction of the GDP growth or decrease was proven after year 2008 (the financial crisis) in all mentioned countries, the predictive power of the yield curve was lowered before the year 2008. Certainly the simple yield curve growth forecast should not serve as a replacement for the complex predictive models, it does, however, provide enough information to serve as a useful check on the more sophisticated forecasts. The results showed that the best predictive lag is a lag of five quarters. The theory says that it should be lag of four quarters. The results presented also confirm that 10-year and 3-month yield spread has significant predictive power for real GDP growth after financial crisis. These findings provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity. These findings might be beneficial for investors and provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity.

Type

D - Article in proceedings

CEP classification

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OECD FORD branch

50206 - Finance

Project

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Continuities

N - Vyzkumna aktivita podporovana z neverejnych zdroju

Publication year

2019

Confidentiality

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Article name in the collection

European Financial Systems 2019. Proceedings of the 16th International Scientific Conference

ISBN

9788021093386

ISSN

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e-ISSN

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Number of pages

6

Pages from-to

178-183

Publisher name

Masaryk University

Place of publication

Brno

Event location

Brno

Event date

Jan 1, 2019

Type of event by nationality

EUR - Evropská akce

UT code for WoS article

000503222600021