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Extraction of Economies Aggregate Expectations, Using a Modified Yield Spread Approach | Financial Engineering Lab
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Extraction of Economies Aggregate Expectations, Using a Modified Yield Spread Approach

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Submitted by Gal Zahavi on Mon, 10/10/2011 - 18:14

 

Extraction of Economies Aggregate Expectations, Using a Modified Yield Spread Approach

 

 

Denis Geidman, Tzachi Perry and Gal Zahavi

 

 

 

Abstract

We present a unified approach for extracting future expectations, regarding economic activity, from various debt instruments. Our approach is based on former findings about the predictive powers of the yield spread (long-term yields minus short-term yields on government bonds), in some countries like USA and Germany. Because of the incompatibility of the yield spread for forecasting economic activity in other countries, a more robust method, that will fit any economy, is needed.

We developed an optimization method for finding an economy specific typical portfolio, which represents the markets aggregate expectations regarding future economic growth.

Our optimization method gave an improvement over the classical yield spread, in predicting future economic growth, and was able to predict growth levels even in countries where the yield spread wasn't able to do so with acceptable significance levels.

 

AttachmentSize
Yield Curve Predictor 101011-1.pdf1.77 MB

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