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| Author: | Ferreira, E. (et al.) |
| Title: | Economic sentiment and yield spreads in Europe |
| Journal: | European Financial Management
2008 : MAR, VOL. 14:2, p. 206-221 |
| Index terms: | Europe economic growth forecasting term structure of interest rates |
| Freeterms: | yield spreads |
| Language: | eng |
| Abstract: | According to Harvey (1988) the forecasting ability of the term spread on economic growth is due to the fact that interest rates reflect investors' expectations. Ex-post data on output or consumption growth has been used as proxies for their expected value in the past literature. Using a direct measure of economic agents' expectations, the Economic Sentiment Indicator (here as: ESI) processed by the European Commission, this paper tests the study's hypothesis. The results indicate that a linear combination of European yield spreads (here as: y-spds.) explains a surprising 93.7 percent of the variability of the ESI. The y-spds.' ability to capture economic agent expectations may be the actual reason for the predictive power of y-spds. about future business cycle. |
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