The Domestic Bond Market and the Development of the Nigerian Capital Market: An Empirical Analysis

Abstract

The fixed income security (bond) market is an important segment of the capital market in market economies. Its importance lies in the fact  that it provides long term investment opportunity for the private investors and long term financing  for firms  at low cost.  Governments use it as a low cost financing instrument for deficit budget. Also the domestic bond market is a source of huge liquidity in the financial market which eventually expands the size of the domestic capital market. Theory has it that, a combination of domestic and foreign participation in the domestic debt market generates liquidity, and lowers the national yield curve. This paper examines these theoretical assertions and relations as it applies to the Nigerian capital market. Using data from the Central Bank of Nigeria, we use the methodology of applied financial econometrics to analyse the various relationships.

Keywords: Domestic bond market, bond market liquidity, capital market size, national yield curve, Nigeria Eurobond, capital market, foreign participation.