Corporate Bond Yield Behaviour: An Empirical Study

of Indian Market

Objective 1: To study the relationship between financial sector variables and corporate
bond yield.
This study uses secondary data of 5-year corporate bond yield (Source: NSE website), and tries
to identify its relationship with some widely used variables. The financial sector /real sector
variables considered in this study are: (i)Secondary market Yield of 5-year G-sec in India
(source: NSE website); (ii) Exchange rate of Indian Rupee vis-a-vis US dollar (XE website) ;
(iii) Call rate in India (source: RBI Handbook of Statistics on the Indian Economy); (iv) Index of
Industrial production (IIP) (source: Trading Economies website); (v) Wholesale Price Index
(WPI) in India (source: Office of Economic Adviser, Ministry of Commerce and Industry,
Government of India); (vi) Sensex (source: BSE website); (vii) Bank credit in India (source: RBI
Handbook of Statistics on the Indian Economy). The secondary data used for the above
parameters are taken for past 5 years (2007-2013).
The co-movements of the 5-year corporate bond yield with some commonly used variables
have been looked into by using correlation analysis and granger causality test.
For this analysis, the 5year corporate bond yield, 5-year G-sec yield, call rate, Sensex,
exchange rate and Index of industrial production, the average monthly figures are calculated. The
contemporaneous correlation of all these variables is calculated. The variables which are having
correlation within 5 per cent level of significance (i.e. p-value <0.05) are considered to be
showing relationship with the corporate bond yield (Table 1).
The contemporaneous correlations indicate high degree of positive association between
corporate bond yield with call rate, G-sec yield and WPI. However, the corporate bond yield is
negatively correlated with sensex and bank credit (at 10 per cent level of significance, p-value
<0.1). The correlation result indicates that correlation of corporate bond yield with the IIP and
exchange rate is not significant.
Please find the correlation coefficient values from Table A.1 of Appendix A.

Table 1 : Correlation of corporate bond yield with other variables

Corporate Call rate

bonds

Corporate
bonds

G-sec 5

Sensex

Index of
industri
al
producti
on

Wholesale Bank
price
credit
index

Exchan
ge rate

Call rate

0.832517
(0.0)

G-sec 5

0.745127
(0.0)

0.896733
(0.0)

Sensex

-0.10038
(0.434)

0.243321
(0.054)

0.452188
(0.0)

IIP

0.061017
(0.634)

0.348764
(0.005)

0.370224
(0.002)

0.521055
(0.0)

WPI

0.566979
(0.0)

0.650199
(0.0)

0.350162
(0.004)

0.003483
(0.978)

0.492498
(0.0)

Bank
credit

-0.091864
(0.474)

0.3765061 0.2388198
(0.002)
7
(0.059)

0.437771156
(0.0)

0.94
(0.00)

0.4703631
(0.0)

Exchange
rate

0.020664
(0.872)

0.031981
(0.803)

0.462171
(0.0)

0.4118310
4
(0.0)

0.880434
(0.0)

0.22504
(0.076)

0.125042
(0.328)

Note: p values are given in the parenthesis.

For a detailed study of the relationship, causal relationships are analysed in the following
section. Before proceeding to test the causal relationship between corporate bond yield and other
explanatory variables, all series are tested for unit root. Table No.2 summarises the results of unit
root tests on levels of these variables (first with only intercept, and then with trend and intercept).
Table 2 : Unit root test result

SERIES

ADF test

Phillips-Perron test

With
Intercept

With Trend
and Intercept

With
Intercept

With Trend
and Intercept

T-statistic
-6.585

T-statistic
-6.602

T-statistic
-6.52

T-statistic
-6.27

Bank Credit

-6.66

-5.37

-3.27

-0.12

Call Rate

-5.703

-5.661

-5.676

-5.632

Exchange Rate

-5.499

-5.537

-5.323

-5.367

G-sec 5 Yield

-5.117

-5.88

-5.117

-5.186

IIP

-4.55

-5.44

-4.54

-5.47

Sensex

-6.55

-6.74

-5.94

-6.04

WPI

-4.75

-6.76

-4.95

-5.80

Corporate bond
Yield

After performing Augmented Dickey-fuller (ADF) test-statistic and the Phillips-Perron test
statistics, the computed test-statistic is smaller than the critical values (Note: 5 per cent critical
value with only intercept is -2.91 and in case of trend and intercept it is -3.48), therefore we can
reject Ho. It means all the series doesn't has a unit root problem and the series is a stationary
series at 1%, 10% and 5% significant level. Therefore, all the variables are tested for unit root,
and found to be stationary. To analyse the causal relationship among these variables, pair-wise
granger causality test is undertaken. The F-statistics and p-values are reported in the table 3.
Please find the p-values from Table A.2 of Appendix A.

The result indicate that the call rate, yield in the G-sec market, sensex and WPI granger caused
the corporate bond yield in this period. In fact, bidirectional causality is also present between
corporate bond and government securities yields. Similar behaviour is evident between corporate
bond yield and sensex. To elaborate, a rise in call rate indicates the emergence of scarcity of
funds in the inter-bank market, and thereby leading the corporate bond yield to go up.

Table 3 : Granger Causality Test Result

Null Hypothesis

F-statistic

P-value

P<0.05 -reject
P>0.05 -accept

CALLRATE does not Granger Cause CORP_BOND

3.54025

0.0022

H0: reject

CORP_BOND does not Granger Cause CALLRATE

1.14272

0.3545

H0:accept

EXRATE does not Granger Cause CORP_BOND

0.85791

0.5686

H0: accept

CORP_BOND does not Granger Cause EXRATE

1.13354

0.3604

H0:accept

GSEC5 does not Granger Cause CORP_BOND

2.63609

0.0156

H0: reject

CORP_BOND does not Granger Cause GSEC5

2.45297

0.0232

H0: reject

IIP does not Granger Cause CORP_BOND

1.25638

0.2873

H0: accept

CORP_BOND does not Granger Cause IIP

0.83663

0.5867

H0: accept

SENSEX does not Granger Cause CORP_BOND

3.45688

0.0027

H0: reject

CORP_BOND does not Granger Cause SENSEX

2.39168

0.0266

H0: reject

WPI does not Granger Cause CORP_BOND

4.495

.001

H0: reject

CORP_BOND does not Granger Cause WPI

.509

.798

H0: accept

BANKCREDIT

does

not

Granger

Cause

1.03

.419

H0: accept

not

Granger

Cause

.77

.596

H0: accept

CORP_BOND
CORP_BOND
BANKCREDIT

does

Overall Summary of Results:

The empirical analysis of the study reveals that the corporate bond yield is positively correlated
with the call rate, Government securities (G-SEC) yield and Wholesale Price Index (WPI).
However, corporate bond yield is negatively correlated with Sensex and bank credit (at 10 per
cent level of significance). In addition, the correlation result indicates that correlation of
corporate bond yield with the IIP and exchange rate is not significant. Furthermore, the causality
analysis shows that the call rate, yield in the G-sec market, Sensex and WPI granger caused the
corporate bond yield in the period of analysis of the study. In fact, bidirectional causality is also
present between corporate bond and government securities yields. Similar behaviour is evident
between corporate bond yield and Sensex. To elaborate, a rise in call rate indicates the
emergence of scarcity of funds in the inter-bank market, and thereby leading the corporate bond
yield to go up.

Appendix
Print out of the output sheet from eview (correlation, unit root and granger test) to be attached.