The purpose of the study was to determine the effects of government economic policies and capital markets forces on fixed income markets in Kenya. The research was guided by three research questions were to determine the effects of fiscal policy on fixed income markets, to determine the effects of monetary policy on fixed income markets, and to determine the effects of capitals markets’ forces on fixed income markets.
The research was designed as an explanatory study with quantitative data that was collected from the official website of Central Bank of Kenya as well as from the website of Nairobi Securities Exchange. Data was collected for a period of five years beginning October 3, 2012 and ending on October 2, 2017. The data included the central bank rate, fiscal deficit, Kenya NSE Govt. Bond Index, and the computed spread between the market-weighted average rate (ask) and the weighted average of accepted bids (bid). Data analysis used multiple linear regression model, correlation analysis, and covariance analysis. Data analysis was conducted in Microsoft Excel using XLSTAT features.
Findings of the study on the effects of fiscal policy on fixed income markets indicate that fiscal deficits, and therefore the fiscal policies, had a weak correlation with the performance of fixed income markets. A weak correlation indicated that there was a limited extent to which fiscal policies can be used in explaining movements in the fixed income markets.
Monetary policy has a strong effect on the level of interest rates in the fixed income markets. The implications of this finding were that the monetary policy announcements, mainly announcements on central bank rate, can be used in predicting the direction of interest rates charged on treasury bills by the investors. However, the monetary policy announcements had a limited impact on the spread between the market-weighted average rate (ask) and the weighted average of accepted bids (bid) indicating the existence of a random walk in the determination of prices of Treasury bill instruments.
On effects of capitals markets’ forces on fixed income markets, FTSE NSE Kenya Govt. Bond Index has little to no impact on the interest rates charged on Treasury bill instruments in the primary market. The findings indicate that the performance of the FTSE NSE Kenya Govt. Bond Index would not be an accurate predictor of the level of interest rates for treasury instruments in Kenya.
Table of Contents
1.0 Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Purpose of the Study
1.4 Research Questions
1.5 Significance of the Study
1.5.1 Investors
1.5.2 Policy Makers
1.5.3 Researchers and Academia
1.6 Scope of the Study
1.7 Definition of Terms
1.7.1 Fixed Income Securities
1.7.2 Government Economic Policy
1.7.3 Capital Markets Forces
1.7.4 Fiscal Balance
1.7.5 Bid-Ask Spread
1.8 Chapter Summary
2.0 Literature Review
2.1 Introduction
2.2 Effects of Fiscal Policy on Fixed Income Markets
2.2.1 Effects of Fiscal Policy on Fixed Income Markets in Advanced Economies
2.2.2 Effects of Fiscal Policy on Fixed Income Markets in Emerging Economies
2.2.3 Effects of Fiscal Policy on Fixed Income Markets in Kenya and Frontier Economies
2.3 Effects of Monetary Policy on Fixed Income Markets
2.3.1 Effects of Monetary Policy on Fixed Income Markets in Advanced Economies
2.3.2 Effects of Monetary Policy on Fixed Income Markets in Emerging Economies
2.3.3 Effects of Monetary Policy on Fixed Income Markets in Kenya and Frontier Economies
2.4 Effects of Capitals Markets’ Forces on Fixed Income
2.4.1 Effects of Capitals Markets’ Forces on Fixed Income in Advanced Economies
2.4.2 Effects of Capitals Markets Forces on Fixed Income in Emerging Economies
2.4.3 Effects of Capitals Markets Forces on Fixed Income in Kenya and Frontier Economies
2.5 Chapter Summary
3.0 Research Methodology
3.1 Introduction
3.2 Research Design
3.3 Population and Sampling Design
3.3.1 Population
3.3.2 Sampling Design
3.3.2.1 Sampling Frame
3.3.2.2 Sampling Technique
3.3.2.3 Sample Size
3.4 Data Collection Methods
3.5 Research Procedures
3.6 Data Analysis Methods
3.7 Chapter Summary
4.0 Results and Findings
4.1 Introduction
4.2 General Findings
4.2.1 Treasury-bill Auction Results
4.2.2 Results of Regression Analysis
4.3 Effects of Fiscal Policy on Fixed Income Markets
4.4 Effects of Monetary Policy on Fixed Income Markets
4.5 Effects of Capital Markets Forces on Fixed Income Markets
4.6 Chapter Summary
5.0 Discussion, Conclusions, and Recommendations
5.1 Introduction
5.2 Summary
5.3 Discussion
5.3.1 Effects of Fiscal Policy on Fixed Income Markets
5.3.2 Effects of Monetary Policy on Fixed Income Markets
5.3.3 Effects of Capital Markets Forces on Fixed Income Markets
5.4 Conclusions
5.4.1 Effects of Fiscal Policy on Fixed Income Markets
5.4.2 Effects of Monetary Policy on Fixed Income Markets
5.4.3 Effects of Capital Markets Forces on Fixed Income Markets
5.5 Recommendations
5.5.1 Recommendations for Improvement
5.5.1.1 Effects of Fiscal Policy on Fixed Income Markets
5.5.1.2 Effects of Monetary Policy on Fixed Income Markets
5.5.1.3 Recommendations on Effects of Capital Markets Forces on Fixed Income Markets
5.5.2 Recommendations for Further Studies
Research Objectives and Key Topics
The primary goal of this study is to analyze the influence of government economic policies (fiscal and monetary) and capital market forces on the performance of fixed income markets in Kenya. The research specifically aims to determine if these factors can accurately predict interest rate movements and spreads within the primary market for treasury instruments.
- Impact of fiscal policy on fixed income market performance
- Influence of monetary policy announcements and Central Bank Rate (CBR) on treasury bills
- Role of capital market forces, specifically the FTSE NSE Kenya Govt. Bond Index
- Interconnectedness and interaction between monetary and fiscal policy
- Predictive modeling of the bid-ask spread in fixed income markets
Excerpt from the Book
1.1 Background of the Study
Government economic policies are tools through which the government influences the economic direction and economic growth of its jurisdiction (Ohanian, Taylor & Wright, 2013). Principally, the government economic policies were categorized into either fiscal policies or monetary policies. The fiscal policies were the means through which the government influences economic growth through controls on government spending and the levels of taxation. On the other hand, the monetary policies include all the means through which the government seeks to direct money supply in the economy and hence the economic growth.
Economists across the world may not agree on how the government policies affect the growth of the economy (Fontana & Setterfield, 2016). Classical economists, neo-classical economists, and the Keynesian economists hold different arguments on how the monetary and fiscal policies affect the economy. However, at the center of the rigorous academiceconomic discourses is the agreement that the monetary and fiscal policies actually affect the growth of the economy and that they had a direct relationship with the levels of gross national income in the economy. Under the gross national incomes of a national is the hidden component of fixed incomes which were the subject of the study (Fontana & Setterfield, 2016).
Fixed income refers to an income, from investment, which is set at a particular figure and does not vary or rise with the rate of inflation (Mankiw, 2014). The two key notes from the definition of fixed income was that fixed income is set at a particular figure which does not vary. The first factor in this definition applies to fixed interest rates or fixed returns on the investment. The fixed rate is payable without any conditions whatsoever (Mankiw, 2014). For instance, if the issuer of a fixed income bond incurs a loss they still would be expect to meet the obligation on the bond simply because such a commitment is not subject to the performance of the issuing entity or any other factor for that matter. The second factor was that in case the fixed income varies, then the variation is only subject to inflation (Mankiw, 2014). This condition applies to the index bonds, also known as the inflation-linked bond, whose income varies partially with the inflation or deflation in the economy. Common in both circumstances however, is the fact that the incomes were specific and predictable (Mankiw, 2014).
Summary of Chapters
1.0 Introduction: Introduces the research, covering background, problem statement, objectives, and significance of studying the Kenyan fixed income market.
2.0 Literature Review: Synthesizes existing research on how fiscal and monetary policies, as well as capital market forces, influence fixed income instruments in various global economies.
3.0 Research Methodology: Details the explanatory research design, data collection methods using secondary sources, and the statistical tools employed, including multiple linear regression.
4.0 Results and Findings: Presents the collected data and analysis of the regression, covariance, and correlation between economic indicators and the fixed income market.
5.0 Discussion, Conclusions, and Recommendations: Interprets the findings, summarizes the study’s conclusions regarding the dominance of monetary policy, and provides policy recommendations.
Keywords
Fixed Income Markets, Kenya, Fiscal Policy, Monetary Policy, Capital Market Forces, Central Bank Rate, Treasury Bills, Regression Analysis, Economic Growth, Bond Index, Interest Rates, Bid-Ask Spread, Market Volatility, Financial Policy, Sovereign Debt
Frequently Asked Questions
What is the core focus of this research?
The research examines the interconnection between government economic policies—specifically fiscal and monetary strategies—and capital market forces, and how these factors impact fixed income markets in Kenya.
What are the primary thematic areas covered?
The study covers the effects of fiscal policy (government spending and taxation), monetary policy (Central Bank Rate and money supply), and capital market performance indices (FTSE NSE Kenya Govt. Bond Index) on treasury instruments.
What is the central research question?
The study seeks to determine the extent to which fiscal policy, monetary policy, and capital market forces influence and can predict movements and spreads in the Kenyan fixed income market.
Which scientific methodology is utilized?
The study uses an explanatory research design with quantitative secondary data collected from the Central Bank of Kenya and the Nairobi Securities Exchange, analyzed through multiple linear regression, correlation, and covariance analysis.
What does the main body of the work address?
The main body reviews existing literature on bond markets, outlines the methodology for analyzing secondary data over a five-year period (2012-2017), and presents results on how these economic factors correlate with fixed income performance.
Which keywords characterize this work?
Key terms include Fixed Income Markets, Fiscal Policy, Monetary Policy, Capital Market Forces, Kenya, Treasury Bills, and Regression Analysis.
How does monetary policy compare to fiscal policy in its impact on Kenyan fixed income markets?
The study concludes that monetary policy, particularly through the Central Bank Rate (CBR), has a stronger, more profound effect on fixed income markets compared to fiscal policy, which showed a weaker correlation.
Does the FTSE NSE Kenya Govt. Bond Index accurately predict interest rates in the primary market?
The findings indicate that the FTSE NSE Kenya Govt. Bond Index has little to no impact on interest rates charged on Treasury bills in the primary market and is not an accurate predictor for these instruments.
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- Dennis Ikua (Autor:in), 2019, The Interconnection Between Government Economic Policies and Capital Markets Influences on Fixed Income Markets in Kenya, München, GRIN Verlag, https://www.grin.com/document/496613
