The Stochastic Dynamics of the Short Term Interest Rate in India
نویسنده
چکیده
The stochastic dynamics of interest rates is a crucial element in modern term structure theories and in the pricing of the various interest rate options which are embedded in bond issues today. International studies show that no model of these dynamics is valid world-wide. This paper studies the dynamics of the short term interest rate in India (the call market rate) and shows that it follows a mean reverting dynamics with a volatility which is independent of the level of interest rates (conforming to the model proposed by Brennan and Schwartz, 1979). This finding has important implications for the theory of the term structure of interest rates. In particular the Cox-Ingersoll-Ross theory of the term structure is strongly rejected in India. The normal rate of interest to which the short term rate mean-reverts is itself shown to be changing over time. The Kalman filtering methodology shows that the normal rate too follows a mean reverting process with a much slower speed of adjustment. A companion paper (Varma, 1996b) translates these findings into a methodology for pricing interest rate options in India and presents applications of the proposed methodology. © Indian Journal of Applied Economics. All rights reserved. The Stochastic Dynamics of the Short Term Interest Rate in India
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تاریخ انتشار 1999