BOTSWANA’S BOND MARKET YIELDS ARE THEY DETERMINISTIC OR DO THEY FOLLOW A STOCHASTIC PROCESS?

Abstract

This paper examines Botswana’s bond market seeking to establish if the bond yields are predictable. The logarithmic bond index returns for the Government Bond Index (GorvI), Corporate Bond Index (CorpI) and Botswana Bond Index (BBI) are used as proxies for the bond yields. The yields are derived from a nine year index series covering a period of 2010 through 2018. The results of the Unit root tests (ADF and KPSS), and Heteroscedasticity (GARCH) model, homogeneously reject the random walk process governing the bond index series. These results suggest that Botswana’s bond returns are characterised by an anti-persistent trend reversing and deterministic chaotic process. This therefore means investors can easily predict bonds market returns hence rendering the market informational inefficient. Policy makers and capital market regulators and the Central Bank therefore need to strengthen their efforts to improve the efficiency of the bond market and hence rendering the Botswana’s Bond market to be attractive to investors. The Botswana Bond Market Association is also encouraged to continue lobbying for the bond market development so as to contribute to the improved efficiency.