A Pure Test for the Elasticity of Yield Spreads



Table 3

Regressions of Changes in Relative Yield Spreads of SCM Long-Term Corporate
Bond Indices on Percentage Changes in the Yield of the Constant Maturity Long-
Term Government of Canada Index and the Return on the Toronto Stock Exchange
300 Index - OLS Estimation

Table 3 reports the results of the OLS estimation of regression model (2) in which the
dependent variable is the monthly change in the relative yield spread. This regression
model is of the following form:

R = a + b P Y + cI + ε,
where R is the monthly change in the relative yield spread, PY is the monthly
percentage change in the yield of the constant maturity, long-term Government of Canada
index, and
I is the monthly return on the Toronto Stock Exchange 300 index. t-values are
in parentheses. Panel A reports the estimates for the entire sample, covering the 08:1976-
07:2001 25-year period. Data during this sample period are dominated by corporate bonds
carrying a standard call provision. Panel B outlines the results for the 01:1995-07:2001
sub-period, in which bonds carrying the doomsday call are expected to dominate all
indices.

_______________________________Panel A:

09:1976-07:2001___________________________

Index

a

b_____________

c

R2

AAA

0.0007
(0.59)

-0.1927

(-6.16)

-0.0553

(-2.26)

0.16

AA

0.0005
(0.44)

-0.2304

(-7.76)

-0.0801

(-3.56)

0.17

A

0.0007
(0.68)

-0.2573

(-9.09)

-0.0889

(-4.15)

0.22

BBB

0.0013
(0.66)

-0.3778

(-6.84)

-0.1247

(-2.98)

0.14

________________Panel B:

01:1995-07:2001

Index________

___________a___________

b_____________

c_________

R2  ~

AAA

N/A

AA

-0.0002

(-0.08)

-0.3294

(-4.42)

-0.1266

(-2.69)

0.23

A

0.0006
(0.25)

-0.3502

(-4.83)

-0.1214

(-2.65)

0.25

BBB

0.0009
(0.23)

-0.2879

(-2.48)

-0.2223

(-3.04)

0.14

37



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