Shape Evolution of the Interest Rate Term Structure

Authors

  • Biwei Chen State University of New York at Binghamton

DOI:

https://doi.org/10.15353/rea.v13i3.4698

Keywords:

Business cycle, recession forecast, U.S. Treasury yield curve, yield spreads

Abstract

This paper adopts a novel approach to studying the evolution of interest rate term structure over the U.S. business cycles and to predicting recessions. Applying an effective algorithm, I classify the Treasury yield curve into distinct shapes and find the less frequent shapes intrinsically linked to the recessions in the post-WWII data. In forecasting recessions, the median-short yield spread trumps the long-short spread for horizons up to 17 months ahead and the yield curve shape is nearly impressive as the median-short spread. Overall, the yield curve shape is an informative but more succinct indicator than the spreads in studying the term structure. Key words: Business cycle, recession forecast, U.S. Treasury yield curve, yield spreads.

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Published

2021-11-09

Issue

Section

Forthcoming