Pricing of Systematic Liquidity in Government of India Bond Market

System-wide liquidity is an important determinant for the pricing efficiency of any asset market and bond markets are no exception. Research on Indian Bond markets is scarce, and very few studies have examined the impact of idiosyncratic factors on bond returns. This paper, probably the first of its kind, examines the impact of systematic factors like, liquidity, term, remaining maturity and re-issuances on the returns of Government of India bond traded in Indian bond markets. Using the NSE’s N-S based ZCYC for the period 2006-2012, this paper finds that the excess bond returns are positively related to systematic liquidity, term risk, and remaining maturity, and negatively related to re-issuances. While all the systematic liquidity factors are statistically significant, the premium for remaining time to maturity and re-issuances does not show any economic significance.