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Yield curve in India and its interactions with the US bond market

Author

Listed:
  • Krishna Prasanna

    (Indian Institute of Technology Madras)

  • Subramaniam Sowmya

    (Indian Institute of Technology Madras)

Abstract

This paper examines the dynamics of the yield curve in India. The study decomposes the entire yield curve into three latent factors (viz. level, slope and curvature) for both the Indian and US sovereign bond markets using the dynamic Nelson Siegel model applying Kalman filter in state space framework. The extracted level factor represents long term, the slope represents short term and the curvature represents medium term interest rate factor. Using the extracted latent factors, the impact of the US yield curve interactions upon the Indian yield curve has been investigated. It provides a new dimension to the literature through investigating the influence of external factors (i.e. US contribution) on the emerging economy yield curve. It is found that the level and slope of the US market leads the long end of the Indian yield curve. The Indian slope was domestic in nature, but after the global financial crisis, linkages between the Indian slope and the US yield curve have increased. The results of this study would enable policy makers to understand the interactions between the domestic yield curve and US market and ensure monetary policy stabilisation. The linkages will also help the global investors in their asset allocation decisions.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:iecepo:v:14:y:2017:i:2:d:10.1007_s10368-016-0340-8
    DOI: 10.1007/s10368-016-0340-8
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    Cited by:

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    2. Chundakkadan, Radeef & Sasidharan, Subash, 2019. "Liquidity pull-back and predictability of government security yield volatility," Economic Modelling, Elsevier, vol. 77(C), pages 124-132.
    3. Oguzhan Cepni & Ibrahim Ethem Guney & Doruk Kucuksarac & M. Hasan Yilmaz, 2021. "Do local and global factors impact the emerging markets' sovereign yield curves? Evidence from a data‐rich environment," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(7), pages 1214-1229, November.
    4. Oleksandr Castello & Marina Resta, 2022. "Modeling the Yield Curve of BRICS Countries: Parametric vs. Machine Learning Techniques," Risks, MDPI, vol. 10(2), pages 1-18, February.
    5. Ronald Ravinesh Kumar & Peter Josef Stauvermann & Hang Thi Thu Vu, 2021. "The Relationship between Yield Curve and Economic Activity: An Analysis of G7 Countries," JRFM, MDPI, vol. 14(2), pages 1-23, February.

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    More about this item

    Keywords

    Yield curve; Dynamic Nelson Siegel model; Global financial crisis;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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