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The time-varying leading properties of the high yield spread in the United States

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  • De Pace, Pierangelo
  • Weber, Kyle D.
Abstract
We propose a comprehensive empirical examination of the time-varying leading properties of two high yield spreads in the United States, and compare them with the leading properties of the term spread between the mid-1980s and the end of 2011. In a large set of in-sample and out-of-sample forecast exercises, we show that high yield spreads are not reliable predictors of future economic activity, as measured by the real gross domestic product and industrial production. Their predictive content for economic growth, which is statistically and economically significant between the end of the 1980s and the beginning of the new century, vanishes in the second half of the 2000s. This disappearance is coincident with (i) structural breaks in the relationship, which largely occurred in the early years of the past decade and during the 2007–2009 financial crisis, and (ii) the reappearance of the leading properties of the term spread in recent years. In general, despite the recent deterioration of much of their predictive content, high yield spreads still tend to outperform the term spread for predicting economic growth at horizons of up to one year in both the in-sample and out-of-sample exercises, even after accounting for time-varying parameters in the model specifications.

Suggested Citation

  • De Pace, Pierangelo & Weber, Kyle D., 2016. "The time-varying leading properties of the high yield spread in the United States," International Journal of Forecasting, Elsevier, vol. 32(1), pages 203-230.
    • Handle: RePEc:eee:intfor:v:32:y:2016:i:1:p:203-230
    DOI: 10.1016/j.ijforecast.2015.01.008
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    1. > Econometrics > Forecasting > Forecasting Economic Activity Using Financial Variables

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    Cited by:

    1. Angela Abbate & Massimiliano Marcellino, 2017. "Macroeconomic activity and risk indicators: an unstable relationship," BAFFI CAREFIN Working Papers 1756, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Caterina Forti Grazzini & Massimo Guidolin, 2013. "Forecasting yield spreads under crisis-induced multiple breakpoints," Applied Economics Letters, Taylor & Francis Journals, vol. 20(18), pages 1656-1664, December.
    3. Kiss, Tamás & Nguyen, Hoang & Österholm, Pär, 2022. "The Relation between the High-Yield Bond Spread and the Unemployment Rate in the Euro Area," Finance Research Letters, Elsevier, vol. 46(PA).
    4. De Pace, Pierangelo & Weber, Kyle D., 2013. "High yield spreads, real economic activity, and the financial accelerator," Economics Letters, Elsevier, vol. 121(3), pages 346-355.

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