Assessing Of Economic-Variables On The Performance Of Bond Market In Nigeria

Assessing Of Economic-Variables On The Performance Of Bond Market In Nigeria

Abstract

The study assessed economic variables on the performance of bond market in Nigeria. The study used time series data spanning a period from 2000 to 2012 and the domestic variables employed were Money supply, Exchange rate, Nigeria treasury bills rate, inflation rate, and US Stock price as a proxy for international influence on bond market in Nigeria. The Augmented Dickey-Fuller and Philip-Perron tests were used to determine the stochastic properties of the series. Within the theoretical framework of the Arbitrage Pricing Theory, a stationary VAR model was estimated and used to analyze the short run impact of selected macroeconomic variables using data for the period. The results show that there was marginal influence of the domestic variables. The effect of changes in the exchange rate contributes a high of 5.6 percent change in bond prices which is larger than that of all the other domestic variables. This implies that the Nigerian bond market is prone to the well-known contagion effect of global financial market. The study recommends that monetary authorities should be careful with the current efforts at internationalization of the Nigerian bond Market.

Chapter One

Introduction

1.1 Background of the Study

The bond market constitute a financial market for the issuance of where new debt known as the primary market and the purchase and sale of debt securities referred to as the secondary market. The debt traded is in the form of bonds but it may include notes, bills, and so on. It is essentially meant to provide for long-term funding for public and private expenditures.

The bond markets constitute a part of the credit market, with bank loans constituting the other main component. The global credit market is three times larger in aggregate than the size of the global equity market. Bonds are securities under the Securities and Exchange Act, and highly regulated. Bonds are not usually secured by collateral but they can be secured and are sold in relatively small denominations of around $1,000 to $10,000. Bonds can be held by retail investors.

Some corporate bonds are listed on exchanges but an essential part of the bond market is the government bond market. The bond market can be classified into corporate Government and agency, municipal, mortgage backed, asset-backed, and collaterialized debt obligations and Funding bonds market.

1.2 Statement of the Problem

The performance of the bond market is influenced by a number of factors .The bond price is determined by micro factors in the short and long run which include the financial and liquidity position of firm, profit or loss and declared etc. Bonds returns are also influenced by some macroeconomic factors such as stock market regulation, inflation, gross domestic product, exchange rate, tax impose by national government, foreign direct investment, industrial production, interest rate, savings, foreign exchange reserves, money supply, imports &exports and oil prices fluctuation The significant role of capital market is to act as regulator . The bond market constitute a financial market for the issuance of where new debt known as the primary market and the purchase and sale of debt securities referred to as the secondary market. The debt traded is in the form of bonds but it may include notes, bills, and so on. It is essentially meant to provide for long-term funding for public and private expenditures.

The bond markets constitute a part of the credit market, with bank loans constituting the other main component. The global credit market is three times larger in aggregate than the size of the global equity market. Bonds are securities under the Securities and Exchange Act, and highly regulated. Bonds are not usually secured by collateral but they can be secured and are sold in relatively small denominations of around $1,000 to $10,000. Bonds can be held by retail investors.

The problem confronting the research therefore is to proffer an Assessment of economic-variables on the performance of bond market in Nigeria.

1.3 Objectives of the Study

1. To proffer an assessment of economic variables and Bond market
2. To proffer an Assessment of economic-variables on the performance of bond market in Nigeria

The bond market constitute a financial market for the issuance of where new debt known as the primary market and the purchase and sale of debt securities referred to as the secondary market. The debt traded is in the form of bonds but it may include notes, bills, and so on. It is essentially meant to provide for long-term funding for public and private expenditures.

The bond markets constitute a part of the credit market, with bank loans constituting the other main component. The global credit market is three times larger in aggregate than the size of the global equity market. Bonds are securities under the Securities and Exchange Act, and highly regulated. Bonds are not usually secured by collateral

1.4 Research Questions

1. What is economic variables and bond market?
2. What is the level of impact of economic variable on performance of bond market?

1.5 Significance of the Study

The study shall proffer a detail appraisal of the economic variable which impedes on the performance of bond market in Nigeria

It shall also serve as a source of information to investors and managers

1.6 Research Hypothesis

Ho The impact of economic variables on the performance of bond market in Nigeria is low

Hi The impact of economic variables on the performance of bond market in Nigeria is high

1.7 Scope of the Study

The study focuses on the assessment of economic variables on the performance of bond market in Nigeria.

1.8 Limitations of the Study

The study was confronted with some constraint which include geographical factors and logistics

1.9 Definition of Terms

Bond

The bond market constitute a financial market for the issuance of where new debt known as the primary market and the purchase and sale of debt securities referred to as the secondary market. The debt traded is in the form of bonds but it may include notes, bills, and so on. It is essentially meant to provide for long-term funding for public and private expenditures.

Foreign exchange rate:

foreign exchange rate is the rate at which one currency will be exchanged for another.

Foreign direct investment:

Foreign direct investment is a passive investment in the securities of a different country such as public stocks and bonds.

Inflation:

Inflation, an increase in the general level of prices of goods and services.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Summary

The APT model suggests that economic variables have impact on bond market. The research carried out the empirical testing of the influence of economic variables on bond market in Nigeria. The ultimate goal is to see if these economic variables (Money supply, Inflation, Exchange rate, Interest rate) and US stock price as a control variable to capture the effects of the state of global economy on the stock return in Nigeria for the period under study. The macroeconomic data series were found to be non-stationary and were made stationary after differencing them once, meaning they are all I(1). A test of cointegration shows the existence of long-run relationship between bond market and economic variables. This is because the ECM coefficient of the Bond market was positive and statistically insignificant. This implies that equilibrium cannot be restored back by errors in the past. Hence we examined the short run dynamic relationship between bond market and economic variables using the VAR model estimated in first difference. Findings reveal that Exchange rate and US price contributes higher in the variation of ASI in the short run. This, we argue suggest that external factors are more important than domestic variable in determining bond market in Nigeria. This also suggests the Nigeria‘s financial market is fairly open to the rest of the world and that their influence is important. Specifically, it indicates that inflation and interest rate have a negative relationship with bond market in the short run, exchange rate and US stock prices have a positive relationship with Bond market while Money supply has a positive but insignificant relationship with bond market, this could be that investors channel their investment funds to other alternative ways e.g portfolio investment, bonds, real estate investment etc in the short run. The granger causality test also shows unidirectional relationship between Bond market and interest rate, inflation and interest rate, money supply and interest rate while a bi-directional relationship exist between US stock prices and Exchange rate. This clearly shows that a change in US stock prices can impact significantly on Exchange rate and vice versa.

5.2. Conclusions

In line with the growing literatures in the emerging market economies like Sardar et al (2004), Abdul (2008), we expect to find a long-run equilibrium relationship between economic variables and bond market. Since most of the time series of the economic variable are not stationary. The VECM results indicated that we forced to reject our null hypothesis that there is no long-run relationship between economic variables (CPI, Exchange rate, Inflation rate, Money supply and US Stock prices) and bond market but disequilibrium will result from incorrective mechanism of the past errors unto the present error. Therefore, we investigated the short-run and dynamic relationship between the economic variables and bond market using the VAR model. The result indicated that Bond market is more responsive to changes in US prices and Exchange rate among the other variables. Hence the following conclusions can be drawn: first, bond market in Nigeria are largely determined by global macroeconomic developments. Secondly, the Nigerian stock market is significantly open to international economy, thus exposing it to the risks associated with international capital movements. This conclusion is supported by the recent collapse of the market following the international financial crisis that started in the USA. Fourthly, the relative importance of the exchange rate also implies that exchange rate policy can have some effects on the stability of the market.

5.3 Recommendations

Based on the empirical findings of the study we recommend that;

Authorities should be watchful of its policy on the internationalization of the stock market through privatization and commercialization of government enterprise because doing so would further render key domestic policy variables ineffective in fine-tuning the behavior of the stock market

The monetary authority should be mindful of regulating and maintaining the exchange rate suitable for investment because it only not affect the external sector of the economy but also contribute in the variation of bond market.

There is need for the government to strengthen political and social stability in the economy to boost the confidence of prospectus investors abroad.

There is information asymmetry with regards to exploiting the full potentials of stock market so therefore the Securities and Exchange Commission should continuously enlighten the general public on the incentives of investing with the stock market.

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