A Pure Test for the Elasticity of Yield Spreads

Table 8

Regressions of Changes in Absolute Yield Spreads of SCM Long-Term Corporate Bond Indices on
Changes in RRBs and Other Seclected Determinants

Table 8 reports the results of both OLS and AR-GARCH estimation of regression model (4) in which the
dependent variable is the monthly change in the absolute yield spread. This regression model is of the
following form:

^δs = β0 + β1∆ Ylt + β2(∆ Ylt)² + β3∆Slope + β4I + ε,
where ∆S is the monthly change in the absolute yield spread, ∆Y_lt is the monthly yield change on the long-
term Government of Canada Real Return Bonds (RBBs), (∆Y_lt)² is a convexity term, ∆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, 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 OLS estimates for AA, A, BBB bonds, covering the 12:1991-
07:2001 11-year period. Panel B reports the AR-GARCH estimates for AA, A, BBB bonds, covering the
12:1991-07:2001 11-year period.

Panel A: 12:1991-07:2001 OLS

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