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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 31, No. 4, pp.449-463
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2018
Received 06 Sep 2018 Revised 18 Nov 2018 Accepted 19 Nov 2018

Has the Predictability of the Yield Spread Changed?

Dong Heon Kim ; Euihwan Park
Dong Heon Kim, Corresponding author, Professor, Department of Economics, Korea University, 145 Anamro, Seongbuk-Gu, Seoul, 02841, South Korea, Tel: +82-2-3290-2226, Fax: +82-02-928-4948 dongkim@korea.ac.kr
Euihwan Park, Student in Ph.D. program, Department of Economics, Korea University, 145 Anam-ro, Seongbuk-Gu, Seoul, 02841, South Korea ssshjasu@korea.ac.kr

JEL Classification: E32, E43, C53

Abstract

This paper examines the stability of the predictive power of the yield spread for future GDP growth. We find that the ability of the spread to predict future GDP growth has weakened since 1984:Q1. Given the decomposition of the yield spread into the expectation component and the term premium component, we investigate the change in the predictability of both components and find that the term premium component appears to have lost the predictive power significantly while the predictive power of the expectation component has remained. We conjecture that since the 1984:Q1, the cyclical movement of the term premium seems to have been reduced due to the significant reduction in the volatility of US macroeconomy.

Keywords:

Yield spread, Break, Predictability, Expectations effect, Term premium effect, Great Moderation

Acknowledgments

This paper is in part based on Euihwan Park’s Ph.D. Dissertation (2018) at the Korea University. The authors would like to thank the seminar participants at Korea University for their helpful comments and suggestions. Dong Heon Kim acknowledges the Korea University Research Grant.

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