Term structure estimation in IIIiquid government bond markets : an empirical analysis for India
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Date
2005-10-27Author
Dutta, Goutam
Basu, S.
Vaidyanathan, K.
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With increasing liquidity of the Indian sovereign debt market since 1997, it has
become possible to estimate the term structure in India. However, the market is
characterised by several frictions that cause individual securities to be priced
differently from the ‘average’ pricing in the market. In such a scenario, traditional
estimation procedures like ordinary least squares using various functional forms
do not perform well. In this paper, we find that mean absolute deviation is a better
estimation procedure in illiquid markets than the ordinary least square. We further
discover a novel liquidity weighted objective function for parameter estimation.
We model the liquidity function using the exponential and hyperbolic tangent
functions and suggest the most robust model for estimating term structures in India
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