Correlations among term structure slopes in eurocurrency markets

Abstract

Using data on Euro-rates for 1978-1996, we have examined the extent to which crosscountry informatíon on tenn structure slopes can be used to improve upon univariate slope forecasts. This is interesting from fue point of view of forecasting economic activity, since term structure slopes have been shown in recent empirical work to anticipate fluctuations in the real economy. On the other hand, the Expectations Hypothesis states that the term structure slope summarizes the available infonnation which is relevant for forecast future interest fates. We have found ample evidence of significant explanatory power in term structure slopes across countries. This leads to improved forecasts of the term structure slope, in some countries, using a foreign slope as indicator. However, the reductions in forecast error measures are not very large.