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Indian G-Sec Market: How the Term Structure Reacts to Monetary Policy

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Author Info
Das, Rituparna Das
Abstract

Against the backdrop of interest rate risk in the fixed income portfolios of the financial institutions in India that arose since the first quarter of the current financial year 2008-09 the influence of monetary policy on the term structure emerged as an important issue for research purposes. In this context the findings in this paper are (i) strongest sensitivity of the term structure at the short end compared to other parts to expected changes in monetary policy, (ii) existence of unutilized arbitraged opportunities in the case of short term securities in absence of stripping, (iii) a mitigating tendency in the fluctuations of Nelson-Siegel-Svensson short rate and the proxy monetary policy rate during the post sample period and (iv) existence of a fear among the market participants about the future liquidity conditions during the last quarter of 2007-08.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16436.

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Date of creation: 02 Jul 2009
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Handle: RePEc:pra:mprapa:16436

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Related research
Keywords: term structure; liquidity; monetary policy; Nelson-Siegel-Svensson; Vasicek; federal funds target rate; MIBOR;

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  2. Hany S. Guirguis & Christos I. Giannikos, 2007. "A note on the effect of expected changes in monetary policy on long-term interest rates," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 99-114, May. [Downloadable!] (restricted)
  3. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June. [Downloadable!] (restricted)
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  4. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
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