The Predictive Power of the Yield Curve: A Theoretical Assessment

Posted: 30 Dec 2003

See all articles by Christel Rendu de Lint

Christel Rendu de Lint

affiliation not provided to SSRN

David Stolin

Toulouse Business School - Economics and Finance

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.

Keywords: General equilibrium, leading indicators, term structure of interest rates, yield curve

JEL Classification: C68, E32, E43, E44

Suggested Citation

Rendu de Lint, Christel and Stolin, David, The Predictive Power of the Yield Curve: A Theoretical Assessment. Available at SSRN: https://ssrn.com/abstract=481682

Christel Rendu de Lint (Contact Author)

affiliation not provided to SSRN

David Stolin

Toulouse Business School - Economics and Finance ( email )

20, bd Lascrosses - BP 7010
Toulouse Cedex 7, 31068
France

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