NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach

Jon Faust, Simon Gilchrist, Jonathan H. Wright, Egon Zakrajsek

NBER Working Paper No. 16725
Issued in January 2011
NBER Program(s):   ME

Employing a large number of real and financial indicators, we use Bayesian Model Averaging (BMA) to forecast real-time measures of economic activity. Importantly, the predictor set includes option-adjusted credit spread indexes based on bond portfolios sorted by maturity and credit risk as measured by the issuer’s “distance-to-default.” The portfolios are constructed directly from the secondary market prices of outstanding senior unsecured bonds issued by a large number of U.S. corporations. Our results indicate that relative to an autoregressive benchmark, BMA yields consistent improvements in the prediction of the growth rates of real GDP, business fixed investment, industrial production, and employment, as well as of the changes in the unemployment rate, at horizons from the current quarter (i.e., “nowcasting”) out to four quarters hence. The gains in forecast accuracy are statistically significant and economically important and owe exclusively to the inclusion of our portfolio credit spreads in the set of predictors—BMA consistently assigns a high posterior weight to models that include these financial indicators.

download in pdf format
   (372 K)

email paper

This paper is available as PDF (372 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16725

Published: Jon Faust & Simon Gilchrist & Jonathan H. Wright & Egon Zakrajšsek, 2013. "Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1501-1519, December.

Users who downloaded this paper also downloaded these:
Gilchrist and Zakrajsek w17021 Credit Spreads and Business Cycle Fluctuations
Gilchrist, Yankov, and Zakrajsek w14863 Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets
Gertler and Lown w7549 The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications
Wright w17154 What does Monetary Policy do to Long-Term Interest Rates at the Zero Lower Bound?
Faust and Wright w13397 Comparing Greenbook and Reduced Form Forecasts using a Large Realtime Dataset
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us