An analysis of bond market liquidity and real sector output in selected African economies

Abstract

There is increasing traction in the literature on the activities of the secondary securities’ market especially with bonds on financial development, with little known on its functional linkage to real sector growth. Following popular theories on bond financing, this study sought to fill this gap by examining if functional tie exists between the secondary bond markets and real sector output among fourteen African countries with functional bond markets and complete data. Among the variables adapted for use are real gross domestic product per capital, corporate bond issues, industrial output, corporate bond turnover, financial education, electricity consumption and institutional quality. The study tested through unit roots to augmented Toda-Yamamoto non-causality and cointegration approach to investigate both the short- and long-term relationships among the different variables. A priori, it was expected that market information would engender capital raising through bond issues and fund allocation. The study however, discovers that corporate bond turnover does not cause industrial output growth, neither does it cause corporate bond issue. An important short run result indicates that the impact of financial education is gradually being felt in the bond markets. For most of the long-run relationships, the study accepted the Null hypothesis. This implies that the investing public do not absorb the usefulness of the market information, which may explain the thinness and shallowness of African corporate bond market overtime. The liquidity signaling effects is however found to influence regulatory institutional quality in the long-run. An accelerated financial market liberalization and tax incentives for private sector provision of market infrastructure are recommended among others for improvement in the African bond markets investigated, among others.