Introduction of Bond Market: Would it be a possible Solution for Bangladesh?

Rahman, Md. Nafizur and Nower, Nowshin and Abbas, Syed Mahdee and Nahian, Abdullah Hill and Tushar, Md. Raqibul Hasan (2020): Introduction of Bond Market: Would it be a possible Solution for Bangladesh?

Abstract

This study aims at investigating the prospects of a bond market in Bangladesh. Most of the developed and developing economies have an active and successful bond market. But Bangladesh despite being one of the fastest-growing economies, does not have an active bond market. Hence, this study was designed to investigate the impact of a bond market on the economic growth of Asian countries and what are the prospects and challenges in Bangladesh. To investigate the benefits of a bond market in Bangladesh, this study examined the relationship between bond market return and economic growth of 4 Asian economies which included, India, Indonesia, Hong Kong, and Japan. The average annual yield of 10-year bonds was used as the independent variable and the annual GDP growth rate of these countries was used as the dependent variable in the econometric model. Data for the last 20 years from 2000 to 2019 were used for all the variables. The Unit Root Test showed that 3 variables were stationary at first difference and the other five variables were stationary at level. The Johansen Co-integration test identified the long-run association among the variables indicating the long-run relationship between bond market return and economic growth. Granger Causality revealed a bi-directional relationship for India; unidirectional relationship for Indonesia (Bond→GDP growth) and Japan (GDP Growth→Bond); and no unidirectional or bidirectional relationship among the bond market return and economic growth of Hong Kong. The various new projects, the overextension of the banking sector, and perhaps the overall good condition of the economy has created the perfect situation to develop a bond market in Bangladesh. As there are conditions that provide advantages in bond market creation, there are also various challenges that the government must overcome. Some of the most important challenges to clear up are the underdeveloped tax system, the illiquid or absent secondary market, the alternative source of debt, and the overall lack of investors. Considering the various developed bond markets these policy implications could seriously aid the development process.

• Item Type: MPRA Paper
• Language: English
• Keywords: GDP growth, Johansen Co integration Test, Granger Causality, Bond Market
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

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