An Empirical Analysis of the Predictive Power of European Yield Curves

Granát, Marcell and Neszveda, Gábor and Szabó, Dorottya (2023) An Empirical Analysis of the Predictive Power of European Yield Curves. FINANCIAL AND ECONOMIC REVIEW, 22 (3). pp. 48-66. ISSN 2415-9271

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Abstract

For various reasons, the yield curve of government bonds serves as a reliable predictor of recessions in the US. This study provides an empirical analysis of whether there is such a relationship in European countries. The methodological framework employed in this study encompasses the utilisation of the Hodrick– Prescott filter in conjunction with a probit model. The modelling procedure in the literature is extended by optimally combining government bond maturity spreads and examining whether the results are also robust for European yield curves. The main finding of the paper is that in the US the spreads calculated from the yield of 7-year and 1-year government bonds are the best predictors, and they are similarly suitable for predicting economic crises in half of the European countries as well.

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