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Bond Spreads as Predictors of Economic Activity in Eight European Economies

Author

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  • Michael Bleaney
  • Paul Mizen
  • Veronica Veleanu
Abstract
In this paper we examine the relationship between real activity and financial market tightness in Europe using data on 500 corporate bonds between July 1994 and May 2011 for Austria, Belgium, France, Germany, Italy, Netherlands, and Spain – and the United Kingdom. We evaluate the importance of bond spreads in predicting real activity at the individual country level, and find they are consistent predictors of real activity even when we include measures of monetary policy tightness, other leading indicator variables and factors extracted from a large macro dataset. Our results are consistent at different forecast horizons and are robust to different measures of the bond spreads. When we compare the predictive ability of the bond spread and the excess bond premium in individual countries within the euro area and outside the euroarea, we find that only the core European countries have similar predictive ability in the bond spreads. Other countries in the euro area, and the UK, do not have similar predictive ability in the bond spreads.

Suggested Citation

  • Michael Bleaney & Paul Mizen & Veronica Veleanu, 2012. "Bond Spreads as Predictors of Economic Activity in Eight European Economies," Discussion Papers 12/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:12/11
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    References listed on IDEAS

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    3. Barnichon, Regis & Matthes, Christian & Ziegenbein, Alexander, 2016. "Assessing the Non-Linear Effects of Credit Market Shocks," CEPR Discussion Papers 11410, C.E.P.R. Discussion Papers.
    4. Guillaume Horny & Simone Manganelli & Benoit Mojon, 2018. "Measuring Financial Fragmentation in the Euro Area Corporate Bond Market," JRFM, MDPI, vol. 11(4), pages 1-19, October.
    5. Shota Kai & Yoichi Matsubayashi, 2017. "Dynamic Impact of Credit Risk on the Real Economy in European Countries," Discussion Papers 1706, Graduate School of Economics, Kobe University.
    6. repec:kob:wpaper:1628 is not listed on IDEAS
    7. Airaudo, Marco & Olivero, María Pía, 2014. "Optimal Monetary Policy with Counter-Cyclical Credit Spreads," School of Economics Working Paper Series 2014-1, LeBow College of Business, Drexel University.
    8. Régis Barnichon & Christian Matthes & Alexander Ziegenbein, 2016. "Theory Ahead of Measurement? Assessing the Nonlinear Effects of Financial Market Disruptions," Working Paper 16-15, Federal Reserve Bank of Richmond.
    9. Michael Bleaney & Paul Mizen & Veronica Veleanu, 2016. "Bond Spreads and Economic Activity in Eight European Economies," Economic Journal, Royal Economic Society, vol. 126(598), pages 2257-2291, December.

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