The predictive power of the term spread revisited: a change in the sign of the predictive relationship

We qualify some of the traditionally accepted results on the predictive power of the term spread over output. We show that in the case of short-term spreads, the direction of the predictive power may be the opposite to that usually found in the empirical literature, which has mostly rested on the use of long spreads, and in theoretical results, that have tended to neglect the consideration of multiperiod dynamics. An analysis of data for Germany and the United States confirms that short-term spreads have low predictive power and sometimes in the opposite direction to the traditional argument. Some suggestions for empirical work are derived from the analysis.

Changes in the informational content of term spreads: Is monetary policy becoming less effective?

We examine the predictive power of term spreads as predictors of economic recessions in Europe and the US. Using a battery of methodologies that include endogenous changepoint detection we find that the predictive power of spread-type variables has changed significantly during the 1980s and 1990s: in the most advanced countries the domestic spread has lost its informative content in favor of international - US and German - spreads, whereas in less developed countries this informational content has appeared during the late 1980s. Given the theoretical arguments for the predictive power, these findings suggest that domestic monetary policy may have become less effective in the most developed countries of the sample.Interest rate spread Recession forecasting Monetary policy

The influence of differences in accounting standards on empirical pricing models: An application to the Fama-French model

We analyze the effect of cross-country differences in accounting standards on the empirical performance of financial pricing models. We show how the lack of uniform accounting standards across countries generates inconsistent estimates of the model parameters, and leads to rejection of the validity of the model. As an empirical application, we analyze how differences in accounting standards affect the performance of the Fama-French (1993) three-factor pricing model. We show that the F-F model is accounting-specific: it works better if the data are homogeneous in terms of accounting standards. This result has an important empirical corollary: the model accounts extremely well for the cross-country returns of firms following IASB standards. Our results have relevant policy implications that reinforce the convenience of accounting homogenization across countries.