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Estimating Term Structure Changes using Principal Component Analysis in Indian Sovereign Bond Market

International Journal of Banking, Risk and Insurance

Volume 1 Issue 1

Published: 2013
Author(s) Name: Golaka C Nath, Manoj Dalvi | Author(s) Affiliation: 1 - Clearing Corporation of India, India; 2 - Associate Professor, Long Island University, New York
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Abstract

This paper analyses the Indian sovereign yield curve shift from January 1997 to May 2012 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.

Keywords: Indian Sovereign Yield Curve, Principal Component, Interest Rates, Bond, Yield Curve, Macro-economics, and Term Structure of Interest Rates

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