Munich Personal RePEc Archive

Estimating term structure changes using principal component analysis in Indian sovereign bond market

Nath, Golaka (2012): Estimating term structure changes using principal component analysis in Indian sovereign bond market.

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Abstract

This paper analyses the India sovereign yield to find out the principal factors affecting the term structure of interest rate changes. We apply Principal Component Analysis (PCA) on our data consisting of zero coupon interest rates derived from government bond trading using Nelson-Siegel functional form. This decomposition of the yield curve highlights important relationship between identified factors and metrics of the term structure shape. The empirical findings support statistical similarities between the Indian yield curve and term structure studies of major countries.

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