Examining the Reaction of the Nigerian Bonds Market to Changes in the Monetary Policy Stance: A Markov Switching -Vector Autoregression Approach

Abstract

This paper examines the reaction of the bonds market to changes in the
monetary policy stance. From the first quarter of Q1:1990 to Q4:2023
using MS-VAR model. Findings from the study shows a positive connect
between interest rate and the bond yield in the market, that is, as interest
rates increase, the yield on Treasury bills in regime 1 also tends to
increase, although marginally while in regime 2, the response of
Treasury bills to Interest rate is much larger and takes on both signs.
Overall, the model suggests that the response of Treasury bills to Interest
rate is nonlinear and regime-dependent, which underscores the
importance of considering the state of the economy when analyzing the
impact of interest rates on Treasury bills. Financial innovation is
therefore required to improve the financial market which is a viable and
important sector for economic growth, is the suggested policy tool.