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J. Risk Financial Manag. 2019, 12(1), 7;

A Divisia User Cost Interpretation of the Yield Spread Recession Prediction

The Center for Financial Stability, 1120 Avenue of the Americas, 4th Floor, New York, NY 10036, USA
Department of Accounting, Economics and Finance, West Texas A&M University, 2501 4th Avenue, Canyon, TX 79016, USA
Received: 30 November 2018 / Revised: 28 December 2018 / Accepted: 30 December 2018 / Published: 6 January 2019
(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)
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A re-evaluation of the role of interest rates is necessary in the wake of the Great Recession. This paper will re-evaluate the interpretation and empirical use of the yield spread as a predictor of recessions, focusing on the simplified methodology in a New York Federal Reserve Bank paper by Estrella and Trubin. Using the user cost difference formula to calculate bond prices following the methodology in the Divisia literature begun by William A. Barnett and a unique data set from the Center for Financial Stability, the yield spread is shown to be a form of the user cost difference, and use of the user cost is shown to marginally improve the predictive abilities of the yield spread. Further research into this view of the link of interest rates and economic activity is proposed. View Full-Text
Keywords: Divisia; yield spread; recessions Divisia; yield spread; recessions

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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

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Mattson, R.S. A Divisia User Cost Interpretation of the Yield Spread Recession Prediction. J. Risk Financial Manag. 2019, 12, 7.

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