Abstract. This study examines the Markov dynamic regime switching behaviour between cash and futures market in respect to interest rate in India. The study uses daily data of volumes, weighted average price, weighted average yield for cash market and total values, open interest, settlement price from 21st January 2014 to 30th October 2014. We a contract i.e. 883GS2023 of NSE has been used for our analysis. All data are sourced from Clearing Corporation of India Ltd. (CCIL) and National Stock Exchange (NSE). We have run regime switching regression to capture the switching behaviour in bull as well as bear state of cash to future and future to cash in six different equations. This model also captures the estimated probability and estimated duration to continue in bull and bear state and does not require to test stationarity or conversion of data into any normalised form. We find switching behaviour in both cash is regime switching the future as well as future is regime switching the cash market and the estimated probability differs from 70% to 97% in different cases. The estimated duration to continue in an existing state has also been captured in 6 different equations.

Keywords: Govt. Securities, Interest Rate Futures (IRF), Markov Dynamic Regime Switching Model.