Introduction:
CCIL has developed a Zero Coupon Sovereign Rupee Yield Curve by following a parametric approach, based on Nelson-Siegel-Svensson equation. The Nelson-Siegel-Svensson equation is as under:
Spot Rate = ß0 + (ß1+ß2) *(1-e (-m/ t1)) / (m/ t 1) – ß2*e (-m/ t 1) + ß3*(1- e (-m/ t 2)) / (m/ t 2) - ß3*e (-m/ t 2)
where,
ß0 is the contribution of long term component
ß1 is the contribution of short term component
ß2 indicates the contribution of medium term component
t 1 is the decay factor and m is the maturity
ß2 & t 1 determine the shape of the curve
ß3, t 2- are the additional parameters to incorporate an additional slope change and a additional hump
For generation of the yield curve, CCIL uses the trade data for outright trades in Central Government Securities (other than special securities) and T- bills. The process followed is as under:
i) Trade data is subjected to a filtering process for removal of market outliers and small value trades, trades in special securities are also excluded.
ii) Each traded security is broken down into its constituent cash flows
iii) An optimisation process is run to minimise the sum of the square of price errors weighted with inverse of respective durations to arrive at the parameters for Nelson-Siegel-Svensson curve based Zero Coupon Yield Curve.
The NSS equation based ZCYC is being used by CCIL from 1st September ’09. Prior to this date, CCIL was using NS equation based ZCYC.
Assessment of Fit
The yield curve generation process as described above has been subjected by CCIL to rigorous testing. Its sustainability under volatile market conditions has also been analysed by generating yield curves for the most volatile days for the period over past three years. The price errors (i.e. the difference between the traded price & the model price of a security) were found to be in the range of Rupees 0-2 (at times price errors of around Rs.3/- observed in case of very illiquid securities), while in terms of average of square of price error per trade, it worked out to be in the range of 30 paisa to Re 1.
Release of ZCYC parameters
CCIL releases data in regard to its Zero Coupon Yield Curve on a daily basis (expected by about 7 p.m. every day). The release is in the form of an Excel file in downloadable form. Anyone desirous of using this information may download the file and use the information. In the same file, two other sheets would be available for comparing current day’s ZCYC with ZCYC of any previous day (upto previous 100 working days)- sheet ‘ZCYC Comparison’ for comparing rates and sheet ‘Comparative Chart’ for graphic comparison. Another sheet, ‘Valuation of Portfolio, is also made available which can be used for valuation of security holdings at current prices as described below.
[Disclaimer: CCIL takes due care and caution in compilation of data and compute various parameters/prices etc. and also takes reasonable care to make the data available in time. CCIL however does not guarantee accuracy, adequacy or completeness of data/prices/computation and is not responsible in any way for making the data/prices available on a regular basis or for any error or omission or for the results obtained from the use of such information.]