A Pure Test for the Elasticity of Yield Spreads

Table A.2

Regressions of Changes in Relative Yield Spreads of SCM Long-Term Corporate
Bond Indices on Percentage Changes in the Yield of the Constant Maturity Long-
Term Government of Canada Index and the Return on the Toronto Stock

Exchange 300 Index - AR-GARCH Estimation

Table A.2 reports the results of the AR-GARCH estimation of regression model (2) in
which the dependent variable is the monthly change in the relative yield spread. This
regression model is of the following form:

∆R = a + b ∆P Y + cI + ε,
where ∆R is the monthly change in the relative yield spread, ∆PY is the monthly
percentage change in the yield of the constant maturity, long-term Government of
Canada index, and I is the monthly 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.

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