The Relationship between Risk and Term Structure of Interest Rates in the Nigerian Bond Market
Keywords:
Risk, Term Structure of Interest Rates, 3-Year Federal Government Sukuk Bonds.Abstract
This study investigates the impact of risk on the term structure of interest rates of 3-year federal government Sukuk bonds in Nigeria. Time series data from 1990 to 2021, obtained from the Central Bank of Nigeria Statistical Bulletin, publications of the Nigeria Bureau of Statistics, and the Nigeria Debt Management Office, are used in the analysis. The yield on federal government Sukuk bonds is modeled as a function of various risk factors, including liquidity risk, interest rate risk, exchange rate risk, and default risk. The analysis employs ordinary least squares regression, cointegration analysis, granger causality tests, unit root tests, and vector error correction models. The findings of the study reveal that 69.4% of the variations in federal government Sukuk bond yields can be explained by the variables included in the model. The lag selection procedure supports the use of a lag of one period. At this lag, the study finds a positive relationship between the variables and the yield of federal government Sukuk bonds. Consequently, the study concludes that risk factors significantly influence the yield of bonds in the Nigerian bond market. Based on the findings, it is recommended that the Nigerian bond market ensures that the security exposures of bonds are adequately protected through careful scrutiny of investors. This will help mitigate the risks associated with different bonds in the Nigerian bond market.
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