A Pure Test for the Elasticity of Yield Spreads

Table 7
Regressions of Changes in Real Yield Spreads of SCM Long-Term Corporate Bond Indices on Changes
in Selected Real Determinants -
AR-GARCH Estimation

Table 7 reports the results of the AR-GARCH estimation of regression model (4) in which the dependent
variable is the monthly change in the real yield spread. This regression model is of the following form:

∆S = β0 + β1∆ Ylt + β2(∆ Yltr )2 + β3∆Slope + β4I + ε,

where ∆S is the monthly change in the real yield spread, ∆Y_l,t,r is the monthly change in the real yield on the
constant maturity long-term Government of Canada index, (∆Y_ltr)2 is a convexity term, ∆Slope is the
monthly change in the real spread between the constant maturity long-term Government of Canada index and
the three-month Treasury bill yield, and I is the monthly real 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.

Panel A: 09:1976-07:2001

Regression Coefficients    AR and GARCH Parameters

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