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 + β1Ylt + β2(Ylt)2 + β3Slope + β4I + ε,
where S is the monthly change in the absolute yield spread, Ylt is the monthly yield change on the long-
term Government of Canada Real Return Bonds (RBBs), (
Ylt)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

Index

β 0

β1

β 2

β 3

β 4

R2

AA

-0.0057

(-0.39)

-0.0491

(-0.18)

0.4723
(1.35)

-0.1030

(-3.86)

-0.0058

(-1.97)

-   --    -

0.16

A

0.0052
(0.38)

-0.0200

(-0.23)

-0.0047

(-0.01)

-0.0856
(-3.48)

-0.0051

(-1.87)

-   --    -

0.13

BBB

0.0219
(0.59)

0.0288
(0.11)

-0.7100

(-0.81)

-0.2510

(-3.74)

-0.0074

(-0.99)

-   --    -

0.13

_____________________________Panel B: 12:1991-07:2001 AR-GARCH__________________________

Regression Coefficients

AR and GARCH Parameters

Goodness of Fit

Index

β 0

β1

β -2

β 3

β 4

m    p q Norm. Test

R2

LM

AA

-0.0042

(-0.41)

0.0389
(0.41)

0.4067
(1.31)

-0.0988

(-4.19)

-0.0051

(-1.86)

1,2       -       -           -

0.23

0.0005

A

0.0074
(0.66)

0.0073
(0.08)

-0.1152

(-0.38)

-0.0904

(-3.75)

-0.0047

(-1.81)

1   --    -

0.17

0.0023

BBB

0.0219
(0.59)

0.0288
(0.11)

-0.7100

(-0.81)

-0.2510

(-3.74)

-0.0074

(-0.99)

-   --    -

0.18

-

42



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