Comparative Study on Chinese Real Economy Predictive Power of Term Spread and Credit Spread

Using an aggregate credit spread index, we find that it has substantial predictive power for corporate bond returns over short and long horizons. The return predictability is economically and statistically significant and robust to various controls. The credit spread index and its components have more predictive power for bond returns than conventional default and term spreads. When decomposing the credit spread index into investment- and speculative-grade components, the latter has more predictive power for future bond returns. The source of the index’s predictive power is from its ability to forecast future economic conditions.

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The predictive power of Nelson-Siegel factor loadings for the real economy

Journal of Empirical Finance ◽

10.1016/j.jempfin.2021.04.008 ◽

2021 ◽

Author(s):

Yang Han ◽

Anqi Jiao ◽

Jun Ma

Keyword(s):

Predictive Power ◽

Real Economy ◽

Factor Loadings ◽

The Real

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Common Factors in the Term Structure of Credit Spreads and Predicting the Macroeconomy in Japan

International Journal of Financial Studies ◽

10.3390/ijfs9020023 ◽

2021 ◽

Vol 9 (2) ◽

pp. 23

Author(s):

Takeshi Kobayashi

Keyword(s):

Business Cycle ◽

Term Structure ◽

Common Factors ◽

Corporate Bond ◽

Credit Spread ◽

Credit Spreads ◽

Real Economy ◽

The Business Cycle ◽

Bond Spreads ◽

Predictive Content

This study extracts the common factors from firm-based credit spreads of major Japanese corporate bonds and examines the predictive content of the credit spread on the real economy. Instead of employing single-maturity corporate bond spreads, we focus on the entire term structure of the credit spread to predict the business cycle. We extend the dynamic Nelson-Siegel model to allow for both common and firm-specific factors. The results show that the estimated common factors are important drivers of individual credit spreads and have substantial predictive power for future Japanese economic activity. This study contributes to the literature by examining the relationship between firm-based credit spread curves and economic fluctuation and forecasting the business cycle.

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Recession Probabilities

Economic Commentary (Federal Reserve Bank of Cleveland) ◽

10.26509/frbc-ec-201609 ◽

2016 ◽

pp. 1-6

Author(s):

O. Emre Ergungor

Keyword(s):

Simple Model ◽

Lower Bound ◽

Interest Rates ◽

Statistical Models ◽

Predictive Power ◽

Yield Curve ◽

Short Term ◽

Term Spread ◽

Portfolio Constraints

Statistical models that estimate 12-month-ahead recession probabilities using the term spread have been around for many years. However, the reliability of the term spread as a predictor may have been affected by short-term interest rates being at zero. At the zero lower bound, long-term yields cannot go too far into negative territory due to the portfolio constraints of institutional investors. Therefore, the yield curve may not invert when it should or as much as it should despite the anticipated path of the economy. I enhance the simple model with two variables that should have predictive power for recessions.

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