Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153720
Authors: 
Buchmann, Marco
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1286
Abstract: 
This paper aims at providing a detailed analysis of the leading indicator properties of corporate bond spreads for real economic activity in the euro area. In- and out-of-sample predictive content of corporate bond spreads are examined along three dimensions: the bonds’ quality , their term to maturity, as well as the forecast horizon at which one intends to predict a change in real activity. Numerous alternative leading indicators capturing macroeconomic and financial conditions are included in the analysis. Along with standard time series forecast models, the Least Angle Regression (LAR) technique is used to build multivariate models recursively. Models built via LAR can be used to produce forecasts and allow one to analyze how the composition and the number of relevant model variables evolve over time. Corporate bond spreads turn out to be valuable predictors for real activity, in particular at forecast horizons beyond one year; Medium risk bond spreads with maturities between 5 and 10 years appear particularly rich in content. The spreads also belong to the group of indicators that implied the highest probability of a recession occurring from a pre-crisis perspective.
Subjects: 
automatic model building
corporate bond spreads
least angle regression
point and density forecasting
JEL: 
E32
E37
E44
G32
Document Type: 
Working Paper

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