Predictability of Term Spread for Economic Activity with Liquidity Premium Theory. Issue 7 (2nd July 2016)

• Record Type: Journal Article
• Authors: Hwang, Sunju; Lee, Hahn Shik
• Is Part Of: Emerging markets finance & trade. Volume 52:Issue 7(2016)
• Page Start: 1528
• Page End: 1541
• Publication Date: 2016-07-02
• Subjects: expectation effect -- liquidity premium theory -- probit analysis -- term spread; E32 -- E37 -- E43; Balkan Peninsula -- Commerce -- Periodicals; Balkan Peninsula -- Foreign economic relations -- Periodicals; Europe, Central -- Commerce -- Periodicals; Europe, Central -- Foreign economic relations -- Periodicals; Europe, Eastern -- Commerce -- Periodicals; Europe, Eastern -- Foreign economic relations -- Periodicals; Turkey -- Commerce -- Periodicals; Turkey -- Foreign economic relations -- Periodicals; Asia -- Commerce -- Periodicals; Asia -- Foreign economic relations -- Periodicals; Eurasia -- Commerce -- Periodicals; Eurasia -- Foreign economic relations -- Periodicals; 382.05
• DOI: 10.1080/1540496X.2016.1158536
• Languages: English
• ISSNs: 1540-496X

Abstract

ABSTRACT: In this article, we explore the predictive content of the term spread based on the liquidity premium theory. We decompose the contribution of the spread into the effect of expected future changes in short rates and the effect of the term premium. We also examine whether the predictive power of the term spread for real economic activity can be enhanced by such a decomposition. The basic finding is that both the expectations effect and the term premium effect are relevant for predicting economic fluctuations. In particular, we find that the decomposition might lead to a better prediction for the business-cycle turning points than the usual term spread.