FACTORS AFFECTING BOND MARKET DEVELOPMENT IN ASIAN DEVELOPING COUNTRIES

W.M.I.M. Lakshan¹ and D.M.U.H. Dissanayake²

¹² Department of Finance, Faculty of Commerce and Management Studies,

University of Kelaniya, Sri Lanka.

Lakshanw_bm17231@stu.kln.ac.lk¹, uththarad@kln.ac.lk²

DOI : 10.57075/jaf922201

ABSTRACT

A financial market is considered to play a key role in economic stability. An economy should encourage investments to achieve financial stability. Bond markets develop a platform for foreign investors to invest their funds in an alternative method of investment other than bank deposits. Maintaining an effective bond market will increase the fund flows to the economy and aggregate spending, ultimately increasing the economic growth of a particular economy. Therefore, developing a bond market is a mandatory requirement for the economic expansion of a country. There are many factors affecting bond market development. However, these factors can vary due to a particular country’s economic condition. As this is an emerging area, a limited number of examines have been carried out. Further, examining the factors affecting bond market expansion in Asian growing countries and the impact of COVID-19 is important as there are no prior studies have been conducted. Therefore, this investigation is being done to look at the factors affecting bond market development in seven developing Asian countries for twelve years from 2010-2021 using panel data regression. The study used seven independent variables namely, the size of the banking system, interest rate spread, money supply, inflation, external debt, economic size, stock market capitalization, and dummy variable of COVID-19 while using the bond market development as the dependent variable. The main element influencing the bond market’s growth is the banking system’s size. It suggests that local credit offered by banking system changes impacts the bond market’s growth. Another important element influencing the growth of the bond market is the interest rate spread. The lending rate and deposit rates should be a concern for policymakers and decision-makers. Changes in those rates imply that it influences the expansion of the bond market. The M2 money supply suggests that changes in the money supply affect how the bond market develops. Another important consideration in the growth of the bond market is inflation.

Keywords: Bond Market Development, Asian Developing Countries, COVID-19, Economic Growth