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An assessment of the predictive abilities of the yield curve: A multi-country study

Svanemyr, Patrick; Bergsjø, Carl Christian Delp
Master thesis
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URI
http://hdl.handle.net/11250/2579997
Date
2018
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  • Master of Science [1117]
Abstract
In this thesis we assess the yield curve’s predictive abilities for the eight countries

in which OECD apply the interest rate spread as a part of their leading indicator

index. We develop a dynamic model that uses the yield curve and a recession lag

to predict recessions. The model is tested both in-sample and pseudo out-ofsample.

Our findings indicate that the yield curve still serve as a leading indicator

in some of the countries, but that OECD should revise its inclusion for some of

the other countries. The study differentiates itself from other studies assessing the

yield curve’s predictive abilities by that we assess the relationship for different

time periods, and we find that the yield curve’s significance has weakened over

the last two to three decades. The weakening of the yield curve’s predictive

abilities coincides with the growing awareness and focus on it as a leading

indicator of recessions. Our research discusses an eminent, but little discussed,

feature of research on the predictive abilities of the yield curve; that it fails to

predict the onset of recessions. The thesis highlights the need for further research

on several types of yield spreads and different types of recession indicators.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2018
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Handelshøyskolen BI

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