Analysing Indian G-Secs with a Predictive Approach
DOI:
https://doi.org/10.12725/ujbm.40.4Abstract
The bond movement being observed keenly by the business communities across the world is primarily because of the fact that large organizations require a huge sum of money which cannot be met in the form of bank loans alone. The solution is to raise money from the public by issuing bonds. It is of equal interest to the investors because bonds are fixed income securities. In this market it is imperative to understand the interplay of macroeconomic factors such as inflation levels, interest rates, foreign exchange rates, purchasing power parity, price movements, monetary and fiscal policies. The rationale behind the decision to invest in a particular bond is directly influenced by the present value of the bond. This paper aims to build a model using Panel Data Regression to predict the present value of the bonds by considering the components of the term structure such as interest rates, maturity, bond yield etc.
References
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Kim, S.-H. (2011). Interest Rate Risk of Bond Investment. Journal of International Business and Economics, 11(3), 123–128.
Longstaff, F. a, & Schwartz, E. S. (1993). Interest Rate Volatility and Bond Prices. Financial Analysts Journal, 49(4), 70. https:// doi.org/ 10.2469/ faj.v49.n4.70
Mele, A. (2003). Fundamental Properties of Bond Prices in Models of the Short-Term Rate. Review of Financial Studies, 16(3), 679–716. https://doi.org/10.1093/rfs/hhg011
Muriu, P., & Nduga, W. (2014). The Impact of Macroeconomic Variables on Stock Prices Market Returns in Kenya. International Journal of Business and Commerce, 3(11), 1–26. https://doi.org/ 10.4038/ suslj.v6i1.1689
Pericoli, M., & Taboga, M. (2012). Bond risk premia, macroeconomic fundamentals and the exchange rate. International Review of Economics and Finance, 22(1), 42–65. https://doi.org/10.1016/j.iref.2011.08.008
Sack, B. P., & Elsasser, R. (2004). Treasury Inflation-Indexed Debt: A Review of the U.S. Experience. FRBNY Economic Policy Review, May(1), 47–63. https://doi.org/10.2139/ssrn.325321
Viceira, L. M. (2012). Bond risk, bond return volatility, and the term structure of interest rates. International Journal of Forecasting, 28(1), 97–117. https://doi.org/10.1016/j.ijforecast.2011.02.018
Waggoner, D. F. (1997). Spline Methods for Extracting Interest Rate Curves from Coupon Bond Prices. Ferderal Reserve Bank of Atlanta. https://doi.org/10.2139/ssrn.86789
Yin, W., & Li, J. (2014). Macroeconomic fundamentals and the exchange rate dynamics: A no-arbitrage macro-finance approach. Journal of International Money and Finance, 41, 46–64. https://doi.org/ 10.1016/ j.jimonfin.2013.10.004
Bajo, E., Barbi, M., & Hillier, D. (2013). Interest rate risk estimation: a new duration-based approach. Applied Economics, (45), 2697–2704. https:// doi.org/10.1080/00036846.2012.667552
Barr, D. G., & Campbell, J. Y. (1997). Inflation, real interest rates, and the bond market: A study of UK nominal and index-linked government bond prices. Journal of Monetary Economics, 39(3), 361–383. https:// doi.org/10.1016/S0304-3932(97)00027-5
Black, F., Derman, E., & Toy, W. (1990). A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options. Financial Analysts Journal, 46(1), 33–39. https://doi.org/10.2469/faj.v46.n1.33
Campbell, J. Y., & Vuolteenaho, T. (2004). Inflation illusion and stock prices. In American Economic Review (Vol. 94, pp. 19–23). https:// doi.org/10.1257/0002828041301533
Cioran, Z. (2014). Monetary Policy, Inflation and the Causal Relation between the Inflation Rate and Some of the Macroeconomic Variables. Procedia Economics and Finance, 16(May), 391–401. https:// doi.org/ 10.1016/S2212-5671(14)00818-1
Collin-Dufresne, P., Goldstein, R. S., & Jones, C. S. (2009). Can interest rate volatility be extracted from the cross section of bond yields? Journal of Financial Economics, 94(1), 47–66. https:// doi.org/ 10.1016/ j.jfineco.2008.06.007
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56. https:// doi.org/10.1016/0304-405X(93)90023-5
Fang, V., & Hung, C.-H. D. (2014). Corporate bond prices and idiosyncratic risk: Evidence from Australia. Journal of International Financial Markets, Institutions and Money, 33, 99–114. https:// doi.org/ 10.1016/j.intfin.2014.07.011
Fu, J., Wang, X., & Wang, Y. (2012). Credit spreads, endogenous bankruptcy and liquidity risk. Computational Management Science, 9(4), 515–530. https://doi.org/10.1007/s10287-012-0153-3
Ghosh, B., Le Roux, C., & Ianole, R. (2017). Fear Estimation–Evidence from BRICS and UK. International Journal of Applied Business and Economic Research, 15(4),195-207.
Ghosh, B., Mc, K., & Ramachandran, T. (2016). Asian Journal of Research in Business Economics and Management Asian Research Consortium PSU Bank Modeling-A comparative modeling approach involving Artificial Neural Network and Panel Data Regression. Asian Journal of Research in Business Economics and Management, 6595800037(62). https://doi.org/10.5958/2249-7307.2016.00037.2
Gruber, J. W., & Vigfussion, R. J. (2012). Interest Rate and The Volatility and Correlation of Commodity Prices. International Institute for Sustainable Development. https://doi.org/10.1017/S1365100516000389
Hautsch, N., & Ou, Y. (2012). Analyzing interest rate risk: Stochastic volatility in the term structure of government bond yields. Journal of Banking & Finance, 36(11), 2988–3007. https:// doi.org/ 10.1016/ j.jbankfin.2012.06.020
Hong, H., & Yogo, M. (2012). What does futures market interest tell us about the macroeconomy and asset prices? Journal of Financial Economics, 105(3), 473–490. https:// doi.org/ 10.1016/ j.jfineco. 2012.04.005
HYMAN, J. A. Y., DOR, A. B. E. N., DYNKIN, L. E. V, HOROWITZ, D., & XU, Z. H. E. (2015). Coupon Effects on Corporate Bonds: Pricing, Empirical Duration, and Spread Convexity. Journal of Fixed Income, 24(3), 52–63. https://doi.org/10.3905/jfi.2014.24.3.052
Ivanova, V., & Puigvert Guti??rrez, J. M. (2014). Interest rate forecasts, state price densities and risk premium from Euribor options. Journal of Banking and Finance, 48, 210–223. https://doi.org/10.1016/ j.jbankfin.2014.03.028
Ivanovski, Z., Stojanovski, T. D., & Ivanovska, N. (2013). Interest Rate Risk of Bond Prices on Macedonian Stock Exchange - Empirical Test of the Duration, Modified Duration and Convexity and Bonds Valuation. Ekonomska Istrazivanja, 26(3), 47–62. https://doi.org/ 10.1080/ 1331677X.2013.11517621
Kim, S.-H. (2011). Interest Rate Risk of Bond Investment. Journal of International Business and Economics, 11(3), 123–128.
Longstaff, F. a, & Schwartz, E. S. (1993). Interest Rate Volatility and Bond Prices. Financial Analysts Journal, 49(4), 70. https:// doi.org/ 10.2469/ faj.v49.n4.70
Mele, A. (2003). Fundamental Properties of Bond Prices in Models of the Short-Term Rate. Review of Financial Studies, 16(3), 679–716. https://doi.org/10.1093/rfs/hhg011
Muriu, P., & Nduga, W. (2014). The Impact of Macroeconomic Variables on Stock Prices Market Returns in Kenya. International Journal of Business and Commerce, 3(11), 1–26. https://doi.org/ 10.4038/ suslj.v6i1.1689
Pericoli, M., & Taboga, M. (2012). Bond risk premia, macroeconomic fundamentals and the exchange rate. International Review of Economics and Finance, 22(1), 42–65. https://doi.org/10.1016/j.iref.2011.08.008
Sack, B. P., & Elsasser, R. (2004). Treasury Inflation-Indexed Debt: A Review of the U.S. Experience. FRBNY Economic Policy Review, May(1), 47–63. https://doi.org/10.2139/ssrn.325321
Viceira, L. M. (2012). Bond risk, bond return volatility, and the term structure of interest rates. International Journal of Forecasting, 28(1), 97–117. https://doi.org/10.1016/j.ijforecast.2011.02.018
Waggoner, D. F. (1997). Spline Methods for Extracting Interest Rate Curves from Coupon Bond Prices. Ferderal Reserve Bank of Atlanta. https://doi.org/10.2139/ssrn.86789
Yin, W., & Li, J. (2014). Macroeconomic fundamentals and the exchange rate dynamics: A no-arbitrage macro-finance approach. Journal of International Money and Finance, 41, 46–64. https://doi.org/ 10.1016/ j.jimonfin.2013.10.004
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Published
2017-07-01
How to Cite
Thomas, S. J., Madhanagopal, S., & Ghosh, B. (2017). Analysing Indian G-Secs with a Predictive Approach. Ushus Journal of Business Management, 16(3), 39-55. https://doi.org/10.12725/ujbm.40.4
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