Abstract
Research on term structure estimation and bond pricing in developed countries has established that liquidity premium is an important component of bond prices, and is attributable to security-specific features. The import ance of liquidity premia is expected to be higher in emerging debt markets, which are characterised by illiquidity in large segments on account of various factors. Analysing daily information on secondary market trading in Gov ernment of India bonds, we find that residual maturity, time since issuance, current yield and issue size account for most of the variation in pricing errors off an estimated term structure. Our results highlight the need for explicit modelling of security-specific factors determining liquidity premia and bond pricing in emerging markets.
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