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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Indian Sovereign Yield Curve, principal component, interest rates, bond, yield curve, macroeconomics, term structure of interest rates
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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