The bond market in South Africa: efficiency and investment issues

Date
2013-09-10
Authors
Liu, Jie Grace
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Abstract
This research studies the bond market in South Africa and other emerging bond markets. Comparison will be made to distinguish the South African bond market from the East Asian and Latin American bond markets. Private and public sectors use bond markets to raise capital either for investment or current expenditures; to measure the effectiveness of the bond market, the criterion used are Liquidity, Diversified investor base, Sound regulatory and legal framework and Well coverage of Maturity Structure and reliable bond yield curve. This paper will make use of the Efficiency Market Hypothesis to test the South African bond market and prove that it is a weak-form efficient. The concept of the efficient market hypothesis theory asserts that the financial markets are informational efficient. There are three common forms of markets stated in the efficient market hypothesis, i.e. weak form efficient market, semi-strong form efficient market and strong form efficient market. These three forms of the efficient market imply that the price cannot be forecast. In order to test the efficiency of the selected bonds, two models will be used in this paper, i.e. simple regression model with time varying parameters and test of evolving efficiency (TEE). The simple regression model cannot capture the nature of the returns on assets, because it assumes that the variance of the return is constant, thus cannot detect changes in efficiency of the market; whereas the TEE, using a GARCH approach with time-varying parameters, is able to capture changes in weak-form efficiency of market through time. However, the GARCH model requires the underlying series to be stationary and a conditional variance that is not constant.
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Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2013.
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