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Estimating term structure changes using principal component analysis in Indian sovereign bond market

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  • Nath, Golaka
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    Abstract

    This paper analyses the India sovereign yield to find out the principal factors affecting the term structure of interest rate changes. We apply Principal Component Analysis (PCA) on our data consisting of zero coupon interest rates derived from government bond trading using Nelson-Siegel functional form. This decomposition of the yield curve highlights important relationship between identified factors and metrics of the term structure shape. The empirical findings support statistical similarities between the Indian yield curve and term structure studies of major countries.

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    File URL: http://mpra.ub.uni-muenchen.de/39229/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39229.

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    Date of creation: 04 Jun 2012
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    Handle: RePEc:pra:mprapa:39229

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    Keywords: Indian Sovereign Yield Curve; principal component; interest rates; bond; yield curve; macroeconomics; term structure of interest rates;

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    1. Michael J. Fleming, 1997. "The round-the-clock market for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-32.
    2. Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2009. "Monetary Policy Shifts and the Term Structure," NBER Working Papers 15270, National Bureau of Economic Research, Inc.
    3. Nikolaus Hautsch & Yangguoyi Ou, 2008. "Yield Curve Factors, Term Structure Volatility, and Bond Risk Premia," SFB 649 Discussion Papers SFB649DP2008-053, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
    5. Joseph G. Haubrich & George Pennacchi & Peter Ritchken, 2008. "Estimating real and nominal term structures using Treasury yields, inflation, inflation forecasts, and inflation swap rates," Working Paper 0810, Federal Reserve Bank of Cleveland.
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