Advertisement

International Economics and Economic Policy

, Volume 14, Issue 2, pp 353–375 | Cite as

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

Original Paper
  • 205 Downloads

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.

Keywords

Yield curve Dynamic Nelson Siegel model Global financial crisis 

JEL Classification

E430 G12 G15 G010 G2 C58 

Notes

Acknowledgements

The first draft of this paper has been presented in “India Finance Conference −2014” organized in association with IIM- Ahmedabad, IIM- Calcutta and IIM – Bangalore held at IIM- Bangalore during December 17–18, 2014.

Authors also acknowledge the financial support provided by Indian Council of Social Science Research (ICSSR) for the research work.

References

  1. Abbritti M, Erba DS, A Moreno S Sola (2013) Global factors in the term structure of interest rates. Working Paper, International Monetary FundGoogle Scholar
  2. Aguiar-Conraria L, Martins MM, Soares MJ (2012) The yield curve and the macro-economy across time and frequencies. J Econ Dyn Control 36:1950–1970CrossRefGoogle Scholar
  3. Bae BY, Kim DH (2011) Global and regional yield curve dynamics and interactions: the case of some Asian countries. Int Econ J 25:717–738CrossRefGoogle Scholar
  4. Berge BTJ, Cao G (2013) Global effects of U.S. Monetary Policy: is unconventional policy different. Federal Reserve Bank of Kansas CityGoogle Scholar
  5. Bowman D, Londono JM, Sapriza H (2015) US unconventional monetary policy and transmission to emerging market economies. J Int Money Financ 55:27–59CrossRefGoogle Scholar
  6. Chandra S, Unsal DF (2014) The effectiveness of monetary policy transmission under capital inflows: evidence from Asia. Borsa Istanbul Rev 14:96–103CrossRefGoogle Scholar
  7. Diebold FX, Li C (2006) Forecasting the term structure of government bond yields. J Econ 130:337–364Google Scholar
  8. Diebold FX, Rudebusch GD, Aruoba SB (2006) The macro economy and the yield curve: a dynamic latent factor approach. J Econ 131:309–338CrossRefGoogle Scholar
  9. Diebold FX, Li C, Yue VZ (2008) Global yield curve dynamics and interactions: a dynamic Nelson–Siegel approach. J Econ 146:351–363CrossRefGoogle Scholar
  10. Djuranovik L (2014) The Indonesian macro economy and the yield curve: a dynamic latent factor approach. J Asian Econ 34:1–15CrossRefGoogle Scholar
  11. Engsted T, Tanggaard C (2007) The co-movement of US and German bond markets. Int Rev Financ Anal 16:72–182CrossRefGoogle Scholar
  12. Hoffmaister AW, Roldós J, Tuladhar A (2009) Yield curve dynamics and spillovers in central and eastern European countries. Working Paper, International Monetary FundGoogle Scholar
  13. Jaramillo L, Weber A (2013) Global spillovers into domestic bond markets in emerging market economies. International Monetary Fund Working Paper, WP/13/264Google Scholar
  14. Kanjilal K (2013) Factors causing movements of yield curve in India. Econ Model 31:739–751CrossRefGoogle Scholar
  15. Kaya H (2013) The yield curve and the macro economy: evidence from Turkey. Econ Model 32:100–107CrossRefGoogle Scholar
  16. Kulish M, Rees D (2011) The yield curve in a small open economy. J Int Econ 85:268–279CrossRefGoogle Scholar
  17. Lange RH (2013) The Canadian macro economy and the yield curve: a dynamic latent factor approach. Int Rev Econ Financ 27:261–274CrossRefGoogle Scholar
  18. Lange RH (2014) The small open macro economy and the yield curve: a state-space representation. North Am J Econ Financ 29:1–21CrossRefGoogle Scholar
  19. Mansur A, Masih M, Ryan V (2005) The term structure of interest rates in Australia: an application of long run structural modelling. Appl Financ Econ 15:557–573CrossRefGoogle Scholar
  20. Matsumura MS, Moreira AR (2011) Assessing macro influence on Brazilian yield curve with affine models. Appl Econ 43:1847–1863CrossRefGoogle Scholar
  21. Mehl A (2009) The yields curve as a predictor and emerging economies. Open Econ Rev 20:683–716CrossRefGoogle Scholar
  22. Morales M (2010) The real yield curve and macroeconomic factors in the Chilean economy. Appl Econ 42:3533–3545CrossRefGoogle Scholar
  23. Patra MD, Pattanaik S, John J, Behera HK (2016) Global spill over’s and monetary policy transmission in India. RBI working paper series No. 3Google Scholar
  24. Singh M, Nejadmalayeri A, Lucey B (2013) Do US macroeconomic surprises influence equity returns? An exploratory analysis of developed economies. Q Rev Econ Finance 53:476–485CrossRefGoogle Scholar
  25. Wongswan J (2006) The response of global equity indexes to US monetary policy announcements. International Financial Discussion Paper, Federal Reserve, Washington, DCGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.Department of Management StudiesIndian Institute of Technology MadrasChennaiIndia

Personalised recommendations