The predictive power of the yield curve: a theoretical assessment |
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| Affiliation: | 1. Foundation for Biomedical Research and Innovation, Kobe, Japan;2. Department of Internal Medicine, Kawanishi City Hospital, Hyogo, Japan;3. Department of Medicine, Nissay Hospital, Osaka, Japan;4. Department of Internal Medicine, Saitama Social Insurance Hospital, Saitama, Japan |
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| Abstract: | Although the empirical evidence about the leading indicator property of the term spread (LIPTS) is powerful, this property lacks a rigorous theoretical foundation. This paper investigates whether dynamic equilibrium asset pricing models are able to provide a theoretical underpinning for the LIPTS. We study an endowment and a production economy. The endowment economy is unable to account for the LIPTS. On the other hand, a model with endogenous production provides a reasonable theoretical justification for the LIPTS. |
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