Investigating the determinants of sovereign bond yield spread in Namibia
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Date
2021
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Journal ISSN
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Publisher
University of Namibia
Abstract
The study investigates the determinants of sovereign bond yield spread in Namibia for the period 2011 to 2019. Secondary quarterly time series data for the period 2011-2019 was used to investigate the determinants of government bond spread over the last decade. The variables used were ten-year government bond yield, GDP growth rate, government debt, current account balance and inflation rate. Data on all variables was obtained from the
Bank of Namibia, except for the GDP growth rate which was obtained from the Namibia Statistics Agency. The tests employed included the unit root tests and the Autoregressive Distributed lag (ARDL) bound test. The study further performed diagnostic tests such asnormality test, serial correlation, heteroscedasticity, Ramsey test, CUSUM and CUSUMSQ to test for the goodness of fit of the model. The results from the unit root testswith the use of the Augmented Dickey-Fuller test indicate that all variables were stationary at first difference except for the current account balance which was stationary at other levels. The bounds test to cointegration revealed that there is joint significanceamong variables, implying a long-run relationship. The ARDL model estimation results reveal that GDP growth rate and inflation rate have a positive and statistically significant effect on the sovereign bond yield spreads in the long run while in the short run GDP growth rate has a negative sign and inflation rate has a positive sign and both are
statistically significant. The study also revealed also that government debt and current account balance have coefficients that are positive and negative, respectively. However,in both the short and long run, these variables are statistically insignificant, meaning they don’t affect the sovereign bond yield spread. The findings also indicate the coefficient of determination of 87.7 per cent, meaning that there is a strong relationship and that the independent variables influence 87.7 per cent of the government bonds yield spread.
Finally, the results of the diagnostic test confirm the long-run relationships between the variables and the stability of the coefficients
Description
A thesis submitted in partial fulfilment of the requirements for the Degree of Master of Business Administration (Finance)
Keywords
Sovereign bond, Gross Domestic Product, Bank of Namibia, Inflation