Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T07:29:43.515Z Has data issue: false hasContentIssue false
  • English
  • Français

Term Structure Forecasts of Long-Term Consumption Growth

Published online by Cambridge University Press:  06 April 2009

Andrea Berardi  and
Walter Torous
Andrea Berardi
Affiliation:
andrea.berardi@mail.univr.it, Università di Verona, SAFE Center, via Giardino Giusti 2, Verona 37129, Italy
Walter Torous
Affiliation:
wtorous@anderson.ucla.edu, University of California, Anderson Graduate School of Management, 110 Westwood Plaza, Los Angeles, CA 90095.
Get access Rights & Permissions [Opens in a new window]

Abstract

Relying on a simple general equilibrium model of the term structure, we show that both nominal yields and real consumption growth rates can be affine in the unobservable state variables. We can then express real consumption growth rates in terms of nominal yields rather than the unobservable state variables with the coefficients of the resultant forecasting relation being endogenously determined by the term structure model. Using term structure data over the 1985 to 2000 sample period, the empirical evidence is consistent with our model more accurately predicting real consumption growth rates than a regression model based on the term spread.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 2 , June 2005 , pp. 241 - 258
Copyright
Copyright © School of Business Administration, University of Washington 2005

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ang, A.Piazzesi, M. and Wei, M.. “What Does the Yield Curve Tell Us about GDP Growth? Unpubl. Working Paper, UCLA (2002).CrossRefGoogle Scholar
Ashley, R.Granger, C. W. J. and Schmalensee, R.. “Advertising and Aggregate Consumption: An Analysis of Causality.” Econometrica, 48 (1980), 1149–1167.CrossRefGoogle Scholar
Brown, R. H., and Schaefer, S. M.. “Interest Rate Volatility and the Shape of the Term Structure.” Philosophical Transactions of the Royal Society A, 347 (1994), 563–576.Google Scholar
Chapman, D. A. “The Cyclical Properties of Consumption Growth and the Real Term Structure.” Journal of Monetary Economics, 39 (1997), 145–172.CrossRefGoogle Scholar
Cochrane, J. H.Asset Pricing. Princeton, NJ: Princeton Univ. Press (2001).Google Scholar
Cox, J. C.Ingersoll, J. E. and Ross, S. A.. “An Intertemporal General Equilibrium Model of Asset Prices.” Econometrica, 53 (1985), 363–384.CrossRefGoogle Scholar
Dai, Q., and Singleton, K. J.. “Specification Analysis of Affine Term Structure Models.” Journal of Finance, 55 (2000), 1943–1978.CrossRefGoogle Scholar
Diebold, F. X.Elements of Forecasting. 2nd ed.Cincinnati, OH: South-Western Publishing (2001).Google Scholar
Diebold, F. X., and Mariano, R. S.. “Comparing Predictive Accuracy.” Journal of Business and Economic Statistics, 13 (1995), 253–263.Google Scholar
Duarte, J. “Evaluating an Alternative Risk Preference in Affine Term Structure Models.” Review of Financial Studies, 17 (2004), 379–404.CrossRefGoogle Scholar
Duffee, G. R. “Estimating the Price of Default Risk.” Review of Financial Studies, 12 (1999), 197–226.CrossRefGoogle Scholar
Duffee, G. R. “Term Premia and Interest Rate Forecasts in Affine Models.” Journal of Finance, 57 (2002), 405–443.CrossRefGoogle Scholar
Duffie, D.Dynamic Asset Pricing Theory. 3rd ed.Princeton, NJ: Princeton Univ. Press (2001).Google Scholar
Dunn, K. B., and Singleton, K. J.. “Modeling the Term Structure of Interest Rates under Non-Separable Utility and Durable Goods.” Journal of Financial Economics, 17 (1986), 27–55.CrossRefGoogle Scholar
Estrella, A., and Hardouvelis, G. A.. “The Term Structure as a Predictor of Real Economic Activity.” Journal of Finance, 46 (1991), 555–576.CrossRefGoogle Scholar
Ferson, W. E., and Constantinides, G. M.. “Habit Persistence and Durability in Aggregate Consumption: Empirical Tests.” Journal of Financial Economics, 29 (1991), 199–240.CrossRefGoogle Scholar
Hamilton, J. D., and Kim, D. H.. “A Re-Examination of the Predictability of Economic Activity Using the Yield Spread.” Journal of Money, Credit and Banking, 34 (2002), 340–360.CrossRefGoogle Scholar
Harvey, C. R. “The Real Term Structure and Consumption Growth.” Journal of Financial Economics, 22 (1988), 305–334.CrossRefGoogle Scholar
Harvey, C. R. “Forecasts of Economic Growth from the Bond and Stock Markets.” Financial Analysts Journal, 45 (1989), 38–45.CrossRefGoogle Scholar
Harvey, C. R. “The Term Structure and World Economic Growth.” Journal of Fixed Income, 1 (1991), 4–17.CrossRefGoogle Scholar
Harvey, C. R. “Term Structure Forecasts Economic Growth.” Financial Analysts Journal, 49 (1993), 6–8.CrossRefGoogle Scholar
Kamara, A. “The Relation between Default-Free Interest Rates and Expected Economic Growth is Stronger Than You Think.” Journal of Finance, 52 (1997), 1681–1694.Google Scholar
Kessel, R. “The Cyclical Behavior of the Term Structure of Interest Rates.” Occasional Paper No. 91, Cambridge, MA: National Bureau of Economic Research (1965).Google Scholar
Langetieg, T. C. “A Multivariate Model of the Term Structure.” Journal of Finance, 35 (1980), 71–97.Google Scholar
Litterman, R., and Scheinkman, J.. “Common Factors Affecting Bond Returns.” Journal of Fixed Income, 1 (1991), 54–61.CrossRefGoogle Scholar
Newey, W., and West, K.. “A Simple Positive Semi-Definite, Heteroskedastic and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Newey, W., and West, K.. “Automatic Lag Selection in Covariance Matrix Estimation.” Review of Economic Studies, 61 (1994), 631–653.CrossRefGoogle Scholar
Plosser, C. I., and Rouwenhorst, K. G.. “International Term Structures and Real Economic Growth.” Journal of Monetary Economics, 33 (1994), 133–155.CrossRefGoogle Scholar
Poterba, J. “Stock Market Wealth and Consumption.” Journal of Economic Perspectives, 14 (2000), 99–118.CrossRefGoogle Scholar
Roma, A., and Torous, W.. “The Cyclical Behavior of Interest Rates.” Journal of Finance, 52 (1997), 1519–1542.CrossRefGoogle Scholar