TY - JOUR AU - Faust,Jon AU - Gilchrist,Simon AU - Wright,Jonathan H. AU - Zakrajsek,Egon TI - Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach JF - National Bureau of Economic Research Working Paper Series VL - No. 16725 PY - 2011 Y2 - January 2011 UR - http://www.nber.org/papers/w16725 L1 - http://www.nber.org/papers/w16725.pdf N1 - Author contact info: Jon Faust Johns Hopkins University Department of Economics Mergenthaler Hall 456 3400 N. Charles Street Baltimore, MD 21218 Tel: 410/516-7614 Fax: 410/516-7600 E-Mail: faustj@jhu.edu Simon Gilchrist Department of Economics Boston University 270 Bay State Road Boston, MA 02215 Tel: 617/353-6824 Fax: NA E-Mail: sgilchri@bu.edu Jonathan H. Wright Department of Economics Johns Hopkins University 3400 N. Charles Street Baltimore, MD 21218 Tel: 410/516-5728 Fax: 410/516-7600 E-Mail: wrightj@jhu.edu Egon Zakrajsek Division of Monetary Affairs Federal Reserve Board 20th Street & Constitution Avenue, NW Washington, D.C. 20551 Tel: 202/728-5864 Fax: 202/452-2846 E-Mail: egon.zakrajsek@frb.gov AB - 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. ER -