Working Paper: NBER ID: w22020
Authors: Rajnish Mehra; Arunima Sinha
Abstract: We examine the term structure of interest rates in India to see if the yield curve can be rationalized based on the ‘expectations hypothesis’. Although we find evidence of predictability for holding period returns, we reject the null hypothesis that the expectations hypothesis holds for the period under consideration. Contrary to the finding in the US, the volatility of Indian bond returns is consistent with the expectations hypothesis. Returns on long-term bonds are less volatile than those of short-term bonds. The volatility puzzle documented by Shiller on US data is not observed in Indian bond returns.
Keywords: No keywords provided
JEL Codes: E43; E44; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| volatility puzzle in US data (E39) | absence in Indian context (O17) |
| yield spread (E43) | future changes in interest rates (E43) |
| expectations hypothesis (D84) | predictability of holding period returns (G17) |
| holding period returns (G12) | expected holding period returns on zero coupon bonds (G12) |
| expectations hypothesis (D84) | long-term yields based on current short-term yields (E43) |
| long-term bonds (G12) | volatility compared to short-term bonds (G12) |