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Term Structure of Interest Rates in India: Issues in Estimation and Pricing

  • Gangadhar Darbha

    (Indian School of Business, Gacthci Bowli, Hyderabad, India)

  • Sudipta Dutta Roy

    (National Stock Exchange of India Ltd, Bandra Kurla Complex, Bandra(E), Mumbai-400061, India)

  • Vardhana Pawaskar

    (National Stock Exchange of India Ltd, Bandra Kurla Complex, Bandra(E), Mumbai-400061, India)

Registered author(s):

    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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    Article provided by Department of Economics, Delhi School of Economics in its journal Indian Economic Review.

    Volume (Year): 38 (2003)
    Issue (Month): 1 (January)
    Pages: 1-19

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    Handle: RePEc:dse:indecr:v:38:y:2003:i:1:p:1-19
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    1. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
    2. 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.
    3. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
    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. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
    6. Schaefer, Stephen M, 1981. "Measuring a Tax-Specific Term Structure of Interest Rates in the Market for British Government Securities," Economic Journal, Royal Economic Society, vol. 91(362), pages 415-38, June.
    7. 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.
    8. 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.
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