A Pure Test for the Elasticity of Yield Spreads

Table 5

Regressions of Changes in Nominal Yield Spreads of SCM Long-Term Corporate Bond Indices on
Changes in Selected Nominal Determinants -

AR-GARCH Estimation

Table 5 reports the results of the AR-GARCH estimation of regression model (4) in which the dependent
variable is the monthly change in the nominal yield spread. This regression model is of the following
form:

^δS = ^β_j + ^'\YLT ^{+ β}2 (^δYLT) + fakSlope ^{+ β}4I + ^ε,
where ∆S is the monthly change in the nominal yield spread, ∆Y_lt is the monthly change in the nominal
yield on the constant maturity long-term Government of Canada index, (∆Y_lt)2 is a convexity term,
∆Slope is the monthly change in the nominal spread between the constant maturity long-term Government
of Canada index and the three-month Treasury bill yield, and I is the monthly nominal return on the
Toronto Stock Exchange 300 index. 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.

39

<<   <   39   40   41   42   43   44   45   >   >>