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Idiosyncratic Factors in Pricing Sovereign Bonds: An Analysis of the Government of India Bond Market

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  • Gangadhar Darbha
  • Sudipta Dutta Roy
  • Vardhana Pawaskar

Abstract

Research on term structure estimation and bond pricing in developed countries has established that liquidity premium is an important component of bond prices, and is attributable to security-specific features. The import ance of liquidity premia is expected to be higher in emerging debt markets, which are characterised by illiquidity in large segments on account of various factors. Analysing daily information on secondary market trading in Gov ernment of India bonds, we find that residual maturity, time since issuance, current yield and issue size account for most of the variation in pricing errors off an estimated term structure. Our results highlight the need for explicit modelling of security-specific factors determining liquidity premia and bond pricing in emerging markets.

Suggested Citation

  • Gangadhar Darbha & Sudipta Dutta Roy & Vardhana Pawaskar, 2002. "Idiosyncratic Factors in Pricing Sovereign Bonds: An Analysis of the Government of India Bond Market," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 1(2), pages 157-181, September.
    • Handle: RePEc:sae:emffin:v:1:y:2002:i:2:p:157-181
    DOI: 10.1177/097265270200100202
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    References listed on IDEAS

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