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

Gangadhar Darbha, Sudipta Dutta Roy and Vardhana Pawaskar
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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

Indian Economic Review, 2003, vol. 38, issue 1, 1-19

Abstract: 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.

Keywords: Term Structure; Zero coupon Yield Curve; Nelson Siegel model; Bond Pricing (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2003
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