A Pure Test for the Elasticity of Yield Spreads

Table 6

Regressions of Changes in Absolute Nominal Yield Spreads of SCM Long-Term Corporate
Bond Indices on Changes in the Real Yield of the Constant Maturity Long-Term Government
of Canada Index and on Changes in the Monthly Inflation Rate

Table 6 reports the results of the AR-GARCH estimation of regression model (5). This regression
model is of the following form:

^δs = ^β0 + ^β,'∖ln^{f + β}2∖ YLT + ^ε,
where ∆S is the monthly change in the nominal yield spread, ∆Y_lt is the monthly change in the real
yield on the constant maturity long-term Government of Canada index, ∆Inf is the monthly change
in the inflation rate. 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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