Title: Determinants of Yield Spread in the Government of India Bond Markets
Abstract: Yield on Government Bonds form the benchmark “risk free rate of return” for the pricing of all financial assets and their derivatives. Yield spread of government bonds is an indicator of efficiency of the treasury market, which is essential for an effective monetary policy. This is one of the first papers on Indian government bond market, with specific focus on yield spread. Using the NSE’s N-S method based ZCYC, and including 186,279 bond trades, over the period 2006-2012, this paper attempts to identify the determinants of yield spread of Government of India Bonds, controlling for various bond specific characteristics. Additionally it also examines the interaction of illiquidity, maturity in both normal, and crisis periods, and analyses the weekly changes in spread to explore the presence of AR(1) process in weekly changes. This paper finds that trades, trade interval, turnover, and coupon are the key determinants of yield spread in the Government of India bond market. Turnover with a negative coefficient of -137 bp, has the maximum impact on spread. Outstanding volume has a positive impact on higher duration trades during crisis period and a negative impact during the normal period. While examining the determinants of changes in yield spread, it is found that previous week’s change in spread has a significant dampening effect. Further the changes in yield spread are positively influenced by trading volume and price dispersion measure, and negatively by changes in spread. Counter intuitively changes in trade interval negatively and significantly influence the changes in yield spreads.
Publication Year: 2017
Publication Date: 2017-01-01
Language: en
Type: article
Indexed In: ['crossref']
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