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The term spread as a cyclical indicator: a forecasting evaluation

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  • Bryan Boulier
  • H. O. Stekler

Abstract

This paper questions whether the spread between long and short-term interests rates is a good cyclical indicator of US economic activity. Probit regressions using the term spread as an independent variable are used to forecast the probability of a recession and the forecasts are evaluated. Using alternative probability thresholds, the turns that were predicted, their timing and the number of recessions that were not forecast were identified and the tradeoff between the number of missed and false predictions is examined. A quantitative measure of the forecast errors is also used to compare the accuracy of probit forecasts with those of two naive standards. Finally, the term spread is evaluated purely as an indicator. It is concluded that this series, by itself, is not a reliable predictor of economic activity.

Suggested Citation

  • Bryan Boulier & H. O. Stekler, 2001. "The term spread as a cyclical indicator: a forecasting evaluation," Applied Financial Economics, Taylor & Francis Journals, vol. 11(4), pages 403-409.
    • Handle: RePEc:taf:apfiec:v:11:y:2001:i:4:p:403-409
    DOI: 10.1080/096031001300313965
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    References listed on IDEAS

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    1. Bernard, Henri & Gerlach, Stefan, 1998. "Does the Term Structure Predict Recessions? The International Evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(3), pages 195-215, July.
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    Cited by:

    1. Alexandra Krystalogianni & George Matysiak & Sotiris Tsolacos, 2004. "Forecasting UK commercial real estate cycle phases with leading indicators: a probit approach," Applied Economics, Taylor & Francis Journals, vol. 36(20), pages 2347-2356.
    2. Herman O. Stekler & Tianyu Ye, 2017. "Evaluating a leading indicator: an application—the term spread," Empirical Economics, Springer, vol. 53(1), pages 183-194, August.
    3. Alexandra Krystaloyianni & George Matysiak & Sotiris Tsolacos, 2004. "Forecasting UK Real Estate Cycle Phases With Leading Indicators: A Probit Approach," Real Estate & Planning Working Papers rep-wp2004-15, Henley Business School, University of Reading.
    4. Masashi Hasegawa & Yuichi Fukuta, 2011. "An empirical analysis of information in the yield spread on future recessions in Japan," Applied Economics, Taylor & Francis Journals, vol. 43(15), pages 1865-1881.

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