The effect of macro economic variables on the liquidity of infrastructure bonds listed at Nairobi securities exchange

Abstract

The study sought to examine the effect of macroeconomic variables on the liquidity of infrastructure bonds listed at the Nairobi Securities Exchange. The level of infrastructure bonds is still modest and under developed in breadth and depth in Kenya compared to mature infrastructure bond markets such as the US, Asian and Brazil which necessitated the study. A causal research design was used to find out the effect of macroeconomic variables on liquidity of infrastructure bond listed at the NSE. Secondary data for the period 2009-2014. This data is available at the CBK Library and can also be obtained from the NSE and KBS. To identify the effect of macroeconomic variables on liquidity of infrastructure bonds, the study considered monthly statistics of volumes traded, interest rates, inflation rates, exchange rates, diaspora remittance and GDP. From the findings one can safely conclude that the interest rates and exchange rates have a positive relationship with liquidity of infrastructure bonds, which is in line with expectation theory of term structure of interest rates. While inflation rate variability, real GDP, diaspora remittances have a negative relationship with infrastructure bond liquidity. From the study findings there is need to create awareness of the role of bond market in the economy and there is need to establish sound macroeconomic policy by the policy makers with a keen interest on exchange rate, interest rate and GDP. The level and volatility of interest rate, the volatility of changes in the exchange rate are very important in liquidity of infrastructure bonds. This will spur the development of infrastructure bonds. Additionally, other measurements of liquidity of infrastructure bonds could be tightness as measured by the bid-ask spread. This is so because various developments in infrastructure bonds such as euro denominated infrastructure bond and the number of issues have increased. Further investigation may be done to establish the effect of macroeconomic and microeconomic determinants outside this study on liquidity of infrastructure bonds. Additionally, further investigation may be done into why the macroeconomic variables exhibited the specified relationships and coefficient magnitude against liquidity of infrastructure bonds. Further studies can use market tightness as measured by the bid-ask spread as measure liquidity of infrastructure bonds.