The yield curve as a predictor of economic activity - the case of Germany, Great Britain and France

HVOZDENSKÁ, Jana. The yield curve as a predictor of economic activity - the case of Germany, Great Britain and France. In European Financial Systems 2019. Proceedings of the 16th International Scientific Conference. Brno: Masaryk University, 2019, p. 178-183. ISBN 978-80-210-9338-6.

Basic information

• Original name: The yield curve as a predictor of economic activity - the case of Germany, Great Britain and France
• Name (in English): The yield curve as a predictor of economic activity - the case of Germany, Great Britain and France
• Authors: HVOZDENSKÁ, Jana (203 Czech Republic, guarantor, belonging to the institution).
• Edition: Brno, European Financial Systems 2019. Proceedings of the 16th International Scientific Conference, p. 178-183, 6 pp. 2019.
• Publisher: Masaryk University

Other information

• Original language: Czech
• Type of outcome: Proceedings paper
• Field of Study: 50206 Finance
• Country of publisher: Czech Republic
• Confidentiality degree: is not subject to a state or trade secret
• Publication form: printed version "print"
• RIV identification code: RIV/00216224:14560/19:00111186
• Organization unit: Faculty of Economics and Administration
• ISBN: 978-80-210-9338-6
• UT WoS: 000503222600021
• Keywords in English: bonds; GDP prediction; slope; spread; yield curve
• Tags: International impact, Reviewed

Abstract

In this paper we study the ability of the yield curve to predict GDP activity in Germany, France and Great Britain. The dataset contains the spread between 10-year and 3-month sovereign bonds and real GDP of the countries mentioned above between the years 2000 and 2018. The natural and probably the most popular measure of economic growth is GDP growth, taken quarterly. The steepness of the bond yield curve should be an excellent indicator of a possible future economic activity. A rise in the short rate tends to flatten the yield curve as well as to slow down real growth the near term. The relationship between the spread and future GDP activity was proved already before. The results showed that the prediction of the GDP growth or decrease was proven after year 2008 (the financial crisis) in all mentioned countries, the predictive power of the yield curve was lowered before the year 2008. Certainly the simple yield curve growth forecast should not serve as a replacement for the complex predictive models, it does, however, provide enough information to serve as a useful check on the more sophisticated forecasts. The results showed that the best predictive lag is a lag of five quarters. The theory says that it should be lag of four quarters. The results presented also confirm that 10-year and 3-month yield spread has significant predictive power for real GDP growth after financial crisis. These findings provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity. These findings might be beneficial for investors and provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity.

Abstract (in English)

In this paper we study the ability of the yield curve to predict GDP activity in Germany, France and Great Britain. The dataset contains the spread between 10-year and 3-month sovereign bonds and real GDP of the countries mentioned above between the years 2000 and 2018. The natural and probably the most popular measure of economic growth is GDP growth, taken quarterly. The steepness of the bond yield curve should be an excellent indicator of a possible future economic activity. A rise in the short rate tends to flatten the yield curve as well as to slow down real growth the near term. The relationship between the spread and future GDP activity was proved already before. The results showed that the prediction of the GDP growth or decrease was proven after year 2008 (the financial crisis) in all mentioned countries, the predictive power of the yield curve was lowered before the year 2008. Certainly the simple yield curve growth forecast should not serve as a replacement for the complex predictive models, it does, however, provide enough information to serve as a useful check on the more sophisticated forecasts. The results showed that the best predictive lag is a lag of five quarters. The theory says that it should be lag of four quarters. The results presented also confirm that 10-year and 3-month yield spread has significant predictive power for real GDP growth after financial crisis. These findings provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity. These findings might be beneficial for investors and provide further evidence of the potential usefulness of the yield curve spreads as indicators of the future economic activity.