Bond market size, liquidity and bond yields in Africa

Abstract

This study investigates the relationship between the size and liquidity of African bond markets to the cost of debt capital in the form of bond yields. While recognizing studies such as Houweling, Mentink, and Vorst (2005) that indicate the size of bond issuance affects the liquidity of bonds in the markets, this study also tests for any connection between size and liquidity for the African region. The empirical analyses were conducted in various African markets that include; Botswana, Egypt, Ghana, Kenya, Mauritius, Namibia, South Africa, Nigeria, Morocco, and Zambia, for a period ranging from 2009 and 2019, using both panel regression with fixed effects and a factor model of sorted portfolios. Although the results of the analysis were mixed across different countries, there is evidence of a negative relationship between liquidity and yields as well as a positive relationship between size and yields. However, we recognize that the results also indicate that size is closely and positively related to liquidity in most of the African countries under study. More research can be done to identify and test other factors that affect bond market liquidity, and how they impact yields to give strength to this research’s finding.