A Pure Test for the Elasticity of Yield Spreads

Table 4

Regressions of Changes in Absolute Yield Spreads of SCM Long-Term
Corporate Bond Indices on Changes in Government of Canada Yields -
AR-GARCH Estimation

Table 4 reports the results of the AR-GARCH estimation of regression model (3) in
which the dependent variable is the monthly change in the absolute yield spread. This
regression model is of the following form:

∖S' = ^β0 + ^{β δ} YT-bill ^{+ β}2∖^sloPe ^{+ ε,}
where ∆S is the monthly change in the absolute yield spread, ∆Y_τ-buι is the monthly
change in the three-month Treasury Bill yield, and ∆Slope is the monthly change in the
spread between the constant maturity long-term Government of Canada index and the
three-month Treasury bill yield. t-values are in parentheses, m gives the degree of the
autoregressive process as determined by the stepwise autoregression method, p and q
are the GARCH(p, q ) parameters, Norm. Test gives the p-value for the normality test
for detecting misspecification of the GARCH model, and finally LM gives the p-value
for the Lagrange multiplier test. 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.

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