Empirical study on the factors affecting bond market returns-evidence from Indian markets

Capital market broadly includes fixed income securities i.e., bond market and equity market. In India, the retail investors are visible mainly in equity markets, whereas the institutional investors are involved in both the markets. Largely interest rates in the economy along with inflation rates and risk in equity markets influences the bond market yields. This paper examines the impact of equity market returns, volatility in equity markets (VIX) and rupee-dollar exchange rate on bond yields. As volatility in the equity market increases the demand for fixed income securities increases, thereby reducing the returns on bonds. In this study it is assumed that the various economic factors affecting bond yield are constant and it is the equity market returns, its volatility and the exchange rate which affects the bond yields.