Arturo Estrella, RPI

 

Arturo Estrella, RPI

Sage 3205

October 15, 2008 4:00 PM - 5:30 PM

This paper examines systematically the role of expectations and term premium components of yields in forecasting recessions. We estimate a canonical term structure model that has been found in the earlier literature to have good properties, applying a new computationally efficient maximum likelihood technique that avoids ad hoc assumptions about estimation errors for particular maturities. Term premium estimates are subjected to validation tests. In contrast to earlier work, results suggest that term premiums may contain some information about future real economic activity but that decomposing nominal yields into expectations and term premium components does not significantly enhance predictive power.

 

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