Challenges in Empirical Estimation of Term Structure in India

Abstract

Subsequent to reform measures initiated by the government during the 1990s signalling the end of the era of government-determined interest rates, the Indian bond market has moved to a phase where market forces have been driving the interest rates putting forward at the same time challenges in the estimation of term structure of interest rates. There are problems in implementation of term structure estimation models in every market, even developed ones, yet due to problems largely attributed to lack of liquidity and efficient price discovery in the Indian bond market, term structure estimation is quite a challenging task. This article is a part of a larger study focusing on estimation and prediction of term structure in Indian bond market and goes deep into issues specific to the Indian bond market related to the challenges faced by researchers and others in term structure estimation.