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Factors causing movements of yield curve in India

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  • Kanjilal, Kakali

Abstract

The article identifies principal reasons underlying the movements of yield curve for government debt market in India for the period Jul '97 to Dec '11. The study finds that though statistically Svensson's (SV) (1994) model outperforms Nelson and Siegel's (NS) (1987) model in yield curve estimation, 99% of the movements in yield curves in India are explained by three factors which are ‘level’ (long-term factor), ‘Slope’ (short-term factor) and ‘Curvature’ (medium-term factor) with ‘level’ contributing more than 90% of its variations. This implies that in more than 90% of cases, the yield curves move parallel either in upward or in downward direction bringing similar effects to all maturity spectrums. This means that yield curve movements in India mainly reflect the monetary policy changes of central bank. Hence, NS's three parameter model is probably more than sufficient to capture all possible shapes of yield curves in India. This finding also suggests that a simple ‘duration and convexity’ hedging strategy should be appropriate to cover maximum risk exposure of government debt market investors in India.

Suggested Citation

  • Kanjilal, Kakali, 2013. "Factors causing movements of yield curve in India," Economic Modelling, Elsevier, vol. 31(C), pages 739-751.
  • Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:739-751
    DOI: 10.1016/j.econmod.2013.01.018
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    Cited by:

    1. Rudra Sensarma & Indranil Bhattacharyya, 2016. "Measuring monetary policy and its impact on the bond market of an emerging economy," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 9(2), pages 109-130, July.
    2. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    3. Sensarma, Rudra & Bhattacharyya, Indranil, 2016. "The impact of monetary policy on corporate bonds in India," Journal of Policy Modeling, Elsevier, vol. 38(3), pages 587-602.
    4. Chundakkadan, Radeef & Sasidharan, Subash, 2019. "Liquidity pull-back and predictability of government security yield volatility," Economic Modelling, Elsevier, vol. 77(C), pages 124-132.
    5. Kakali Kanjilal, 2014. "Rational expectation hypothesis: empirical evidence from government debt market in India," International Journal of Indian Culture and Business Management, Inderscience Enterprises Ltd, vol. 9(3), pages 353-370.
    6. Lange, Ronald Henry, 2018. "The term structure of liquidity premia and the macroeconomy in Canada: A dynamic latent-factor approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 164-182.
    7. Krishna Prasanna & Subramaniam Sowmya, 2017. "Yield curve in India and its interactions with the US bond market," International Economics and Economic Policy, Springer, vol. 14(2), pages 353-375, April.

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