Capital market openness and volatility: an investigation of five Sub-Saharan treasury bill rates

Abstract

Purpose – The purpose of this paper is to model the volatility of treasury bill (T-bill) rates in five Sub-Saharan capital markets to investigate whether or not differences in capital mobility affect volatility. Design/methodology/approach – Primary data was collected from weekly T-bill auctions in five Sub-Saharan countries and was analysed using a range of Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models in order to determine the volatility characteristics of each of these instruments. Differences in the institutional arrangements for each market are used to interpret the results of the econometric analysis. Findings – Evidence is presented that indicates that the size and financial liberalisation of capital markets affect volatility. While the markets with the greatest exposure to international investors exhibit greater volatility in the long-run, the presence of non-residents in the market appears to contribute to more efficient pricing of these instruments. Research limitations/implications – The limited sample restricts the ability to generalise these findings, however, the finding that differences exist in the volatility of these markets even though they are geographically similar indicates the value of this methodological approach. Practical implications – The finding that greater capital mobility may result in increased volatility and greater efficiency has significant policy implications for governments and market regulators who have to weigh the costs and benefits of financial liberalisation. Originality/value – The paper employs a unique data set to model the volatility characteristics of the selected T-bills to improve the understanding of the behaviour of these important instruments in Sub-Saharan frontier markets. More specifically the study provides a novel empirical approach to addressing the question of whether capital mobility is linked to increased volatility. The finding that capital mobility is linked to greater market efficiency offers a fresh insight to this debate.