Term Structure of Interest Rates in India: Issues in Estimation and Pricing
The gradual shift to market related rates of interest on government borrowing has now made it possible to estimate the term structure in the Indian debt markets. Estimates of term structure provide the basis for valuation and risk measurement of sovereign and non-sovereign securities. It gives the interest rate structure in the economy that can be used to analyze the extent of impact of monetary policy. The present paper attempts to provide a framework for the estimation of the daily term structure taking into account important aspects related to the Indian debt market. We improve upon existing empirical work by highlighting the importance of various institutional details that lead to intra security price dispersion. Using the parsimonious Nelson-Siegel functional form, we provide daily estimates of the sovereign ZCYC using information on secondary market trades in Government securities available from the Wholesale Debt Market of the National Stock exchange (NSE-WDM). The estimated model is found to perform satisfactorily in terms of the mean absolute price of errors.
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Volume (Year): 38 (2003)
Issue (Month): 1 (January)
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- Carleton, Willard T & Cooper, Ian A, 1976. "Estimation and Uses of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 31(4), pages 1067-83, September.
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University of Chicago Press, vol. 44(1), pages 19-31, January.
- Tom Doan, . "RATS program to estimate term structure with cubic splines," Statistical Software Components RTZ00019, Boston College Department of Economics.
- Robichek, Alexander A & Niebuhr, W David, 1970. "Tax-Induced Bias in Reported Treasury Yields," Journal of Finance, American Finance Association, vol. 25(5), pages 1081-90, December.
- Edwin J. Elton & T. Clifton Green, 1998. "Tax and Liquidity Effects in Pricing Government Bonds," Journal of Finance, American Finance Association, vol. 53(5), pages 1533-1562, October.
- McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
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