Does Information Asymmetry moderate the relationship between Liquidity and Treasury Bonds in Kenya?

Abstract

In bond markets, information efficiency seem to conduit the link between the bond liquidity and yields of treasury bonds. The objective of this study was assess moderating role of information efficiency on the relationship between bond liquidity and bond yields of treasury bonds in Kenya. The moderating effect of information efficiency on the relationship between bond liquidity and bond yields of treasury bonds in Kenya was computed using the method proposed by Baron and Kenny (1986). Panel regression analysis was used to test the hypothesized relationship. Hausman specification test was used to determine the best panel data model of analysis. The study adopted longitudinal research designs to collect, measure and analyse the daily panel data of treasury bonds for 10 years starting 2009 to 2018. This study used a population of seven Kenyan treasury bonds, which were actively trading at the secondary market and had bond tenor of 5 years and above. In 2009 is when the government automated the bonds trading at Nairobi Securities Exchange (NSE). Using the criterion technique, the bonds that met these criteria were 5-year bond, 10-year bond, 12-year bond, 15-year bond, 20-year bond, 25-year bond and 30 years bond constituted in Central Bank of Kenya (CBK) Treasury bond series. Study indicated that there was a very low positive correlation between bond yields of treasury bonds in Kenya and information efficiency which was statistically significant. Increased information efficiency was associated with better bond yields of treasury bonds in Kenya. The results rejected the null hypothesis meaning that the information efficient had moderating effect on the relationship between the bond liquidity and bond yields of treasury bonds. This study was crucial to scholars since introduction of moderating variable on the relationship between the bond liquidity and bond yields unravelled differences among the existing empirical evidences. The study recommend improved customer care practices that would increase trader’s subscription at treasury bonds market.

Keywords: Information Efficiency, Bond Liquidity, Bond Yields