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The predictive ability of a risk-adjusted yield spread for economic activity in Europe

By A. Guender and B. Tolan


This paper examines whether the pricing of risk is important for macroeconomic activity at the country level. We design a risk-adjusted yield spread and test its predictive content for economic activity on the periphery and the centre of Europe over the 1990-2012 period. This risk-adjusted bond yield spread is defined in a cross-country context and referred to as the GZ-type spread. Increases in the yield on corporate bonds issued in the countries on the periphery relative to the riskless yield (calculated using German zero-coupon term structure data) reflect increases in the risk premium that the financial market imposes on borrowers. The risk premium rises in all countries during European-wide recessions of the recent past, particularly those associated with the Global Financial and the Sovereign Debt Crisis. Our findings indicate further that this GZ-type spread acts as a reliable signal for imminent and near-term economic activity in countries where financial markets were shaken to their foundations during the Crisis period. For Germany, the GZ-spread has predictive content for industrial production but not for the unemployment rate. For GDP its predictive ability is confined to the EMU period

Topics: corporate bond yield spread, predictive content, economic activity in Europe, financial and debt crisis, Field of Research::14 - Economics::1402 - Applied Economics::140212 - Macroeconomics (incl. Monetary and Fiscal Theory), Field of Research::14 - Economics::1402 - Applied Economics::140210 - International Economics and International Finance
Publisher: University of Canterbury. Department of Economics and Finance
Year: 2016
OAI identifier: oai:ir.canterbury.ac.nz:10092/12540
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