An examination of the information role of the yield spread and stock returns for predicting future GDP

This paper utilizes out-of-sample forecasting experiments to examine whether the yield spread or returns on stock indices provide information content for future real activity in Italy, the UK, USA and Germany. A variable is said to provide information content if it improves the quality of the forecast for the forecasted variable. Four forecasting models containing yield spread and stock return variables are tested during the period 1961 to 1996. The usefulness of the yield curve and stock returns to predict GDP differs across countries and over time and neither variable is found to consistently provide information content for forecasting economic activity throughout the study period.