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,'lnf + β2 YLT + ε,
where S is the monthly change in the nominal yield spread, Ylt 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.

Panel A:

09:1976-07:2001

Regression Coefficient_______

AR and GARCH Parameters

Index

β 0

β1

β 2

m

P

q

Norm. Test

R2

LM

AAA

-0.0012

(-0.15)

-0.2232

(-8.02)

-0.1801

(-8.47)

1,4

1

1

<0.0001

0.14

<.0001

AA

-0.0036

(-0.8)

-0.1542

(-6.74)

-0.1350

(-9.03)

1, 2, 4

1

1

<0.0001

0.16

<.0001

A

-0.0049

(-0.82)

-0.1527

(-5.99)

-0.1204

(-7.11)

1, 2

1

1

0.0003

0.14

<0.0001

BBB

0.0018
(-0.13)

-0.1822

(-3.22)

-0.1454

(-3.83)

-

1

1

<0.0001

0.07

-

Panel B:

01:1995-07:2001

Regression Coefficients

______AR and GARCH Parameters______

Goodness of Fit

Index

β 0

β1

β 2

m

P

q

Norm. Test

R2

LM

AAA

N/A

AA

-0.0079

(-0.5)

-0.2082

(-2.33)

-0.1778

(-2.62)

-

-

-

-

0.08

-

A

-0.0021

(-0.14)

-0.1916

(-2.27)

-0.1629

(-2.53)

-

-

-

-

0.08

-

BBB

-0.0045

(-0.19)

0.1266
(-0.93)

0.1143
(-1.11)

-

-

-

-

0.16

-

40



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