How does sovereign bond volatility interact between African countries?

Abstract

The importance of sovereign bond as a source of financing revenue deficit, benchmarking for corporate bonds and debt management in Africa, calls for continual monitoring of its volatility dynamics. This study evaluates the nature of sovereign bond volatility interaction between African countries using bivariate BEKK-GARCH (1, 1) model. Based on a sample of eight African countries, the results show evidence of unidirectional volatility spillover from Morocco sovereign bond to Egypt sovereign bond. Next, the results show absence of volatility interaction between Ghana and Nigeria sovereign bonds. The results further show the existence of bidirectional volatility transmission between Uganda and Kenya. Finally, the results indicate evidence of bidirectional volatility interaction between Botswana and South Africa. Overall, the results show existence of full interaction between Uganda–Kenya and Botswana–South Africa sovereign bond returns, partial interaction between Egypt and Morocco sovereign bond returns and no interaction between Ghana and Nigeria sovereign bonds markets. Thus, these results provide valuable implications for sovereign and corporate credit risk management, as well as strategy for monitoring and minimising negative effect of sovereign bond volatility spillover in Africa.

Volatility Spillover Across Sovereign Bond Markets Between African, Emerging and USA Economies

“…In Africa, Emenike (2022) found a unidirectional bond market volatility spillover from Morocco to Egypt, bidirectional between Uganda and Kenya and Botswana and South Africa and no interaction between Ghana and Nigeria. Hooker (2004) established a negative relationship between stock market returns and the interest rate for 29 emerging markets in Asia, Latin America, Africa and the Middle East, and Adjasi & Biekpe (2006) -for Africa.…”