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Abstract
The Nigerian bond market is currently one of the most liquid in sub-Saharan Africa. Many African countries regard it as a model from which to learn and based on which to develop their respective bond markets. The developments achieved in the Nigerian bond market are of particular interest to both investors and fixed income analysts—both domestic and international. One of the important tools required for fixed income analysis, pricing, and trading is the yield curve. To the best of our knowledge, even though the Nigerian bond market has a secondary market yield curve, the yield curve is a yield-to-maturity curve, and not zero-coupon yield curve. The purpose of this study is to model the zero-coupon, par, and forward yield curves for the Nigerian bond market. We use various methods such as the piecewise cubic Hermite method, the piecewise cubic spline method (with not-a-knot end condition), the Nelson–Siegel–Svensson method, and the variable roughness penalty method. Data are obtained from the FMDQ OTC website. The results show that the piecewise cubic Hermite method is very suitable for producing the Nigerian par and zero-coupon yield curves. Our best recommended method for producing the Nigerian zero-coupon yield curve is therefore the piecewise cubic Hermite method, followed by the Nelson–Siegel–Svensson method. For the forward yield curve, the results show that the best method is the Nelson–Siegel–Svensson method, followed by the variable roughness penalty method.
Highlights
The Nigerian bond market has been in existence since 1946, and that was when the first government bond—the Development Stock—was issued (Soludo, 2005)
In 1958, a financial reform was introduced and this resulted in the creation of the Central Bank of Nigeria (CBN), as well as the creation of marketable public debt securities
While the Development Stock was issued to finance developmental projects and to provide avenue for capital market investment, treasury bills were issued for open market operations and to provide avenue for money market investment
Summary
The Nigerian bond market has been in existence since 1946, and that was when the first government bond—the Development Stock—was issued (Soludo, 2005). Various financial reforms were undertaken afterward to develop and deepen the bond market. In 1958, a financial reform was introduced and this resulted in the creation of the Central Bank of Nigeria (CBN), as well as the creation of marketable public debt securities. To encourage trading at the secondary market level, the Nigerian Stock Exchange (NSE) was founded in 1960 and was fully operational in 1961. In 1986, a structural adjustment program saw a decline in the issue of the only capital market debt instrument, the Development Stock. The purpose was to allow the financial sector develop a welldefined capital market which was based on public sector investment alone, and on the private sector investment. By 1988, the issuance of Development Stock had been completely suspended
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