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Factors causing movements of yield curve in India

Listed author(s):
  • Kanjilal, Kakali
Registered author(s):

    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999313000217
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    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 31 (2013)
    Issue (Month): C ()
    Pages: 739-751

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    Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:739-751
    DOI: 10.1016/j.econmod.2013.01.018
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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