Chauvet, Marcelle and Senyuz, Zeynep (2008): A Joint Dynamic BiFactor Model of the Yield Curve and the Economy as a Predictor of Business Cycles.

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Abstract
This paper proposes an econometric model of the joint dynamic relationship between the yield curve and the economy to predict business cycles. We examine the predictive value of the yield curve to forecast both future economic growth as well as the beginning and end of economic recessions at the monthly frequency. The proposed multivariate dynamic factor model takes into account not only the popular term spread but also information extracted from the entire yield curve. The nonlinear model is used to investigate the interrelationship between the phases of the bond market and of the business cycle. The results indicate a strong interrelation between these two sectors. Although the popular term spread has a reasonable forecasting performance, the proposed factor model of the yield curve exhibits substantial incremental predictive value. This result holds insample and outofsample, using revised or real time unrevised data.
Item Type:  MPRA Paper 

Original Title:  A Joint Dynamic BiFactor Model of the Yield Curve and the Economy as a Predictor of Business Cycles 
Language:  English 
Keywords:  Forecasting, Business Cycles, Yield Curve, Dynamic Factor Models, Markov Switching. 
Subjects:  C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models; Multiple Variables > C32  TimeSeries Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models E  Macroeconomics and Monetary Economics > E3  Prices, Business Fluctuations, and Cycles > E32  Business Fluctuations; Cycles E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E44  Financial Markets and the Macroeconomy 
Item ID:  15076 
Depositing User:  Marcelle Chauvet 
Date Deposited:  07. May 2009 05:48 
Last Modified:  12. Feb 2013 22:00 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/15076 