Leading indicator properties of US high-yield credit spread

In this paper we examine the out-of-sample forecast performance of high-yield credit
spreads regarding employment and industrial production in the US, using both a point
forecast and a probability forecast exercise. Our main findings suggest the use of few
factors obtained by pooling information from a number of sector-specific high-yield
credit spreads. This can be justified by observing that there is a gain from using a
principal components model fitted to high-yield credit spreads compared to the
prediction produced by benchmarks, such as an AR, and ARDL models that use either
the term spread or the aggregate high-yield spread as exogenous regressor.