This report is focused on the relationship which exists among domestic financial development and government bonds. For this study, cross country evidence has been used for analysing the proposed relationship. The first research question which is developed for this study is what is the relationship between domestic financial development and the return in sovereign bonds across various economies and the second research question is how does the relationship between financial development and returns in sovereign bonds compare between various groups of economies (the developed and developing economies). This report has designed the research design for this study where research method and strategy, inclusion and exclusion criteria along with the research ethics are discussed. At the end, timescale and expected results are presented

 

Introduction

The financial sector plays crucial role in influencing macro-economic growth of any country both directly and indirectly, making them key to realisation of better returns for government securities and instrument. Directly, financial sector take part in distribution and rechanneling of credit. Consequently, highly developed financial systems are likely to promote efficient credit management leading to better asset returns (Boubaker et al., 2017). Secondly, the market conditions and dynamics do differ, and it is possible that these may disturb the financial development and macro-economic dynamics (Dimic et al., 2016). Further, the foreign investors, interested in government bonds tend to have greater confidence in bonds from economies with well developed financial systems, creating greater potential for increased bond return. In light of the foregoing, this study will examine how financial development a cross countries influences the government yield bonds and how such relationship compare in different market economies (namely developed and developing market economies).

Research Questions and Hypothesis Formulation

This study seeks to address the following two research questions:

1. What is the relationship between domestic financial development and the return in sovereign bonds across various economies?
2. How does the relationship between financial development and returns in sovereign bonds compare between various groups of economies (the developed and developing economies)?

The topical arrangement for the substantive part of the literature review will be consistent with the two research questions defined for the study.

The relationship between economic growth and stock returns have been a subject of a number of past studies (Dellas and Hess, 2005; Li et al., 2016), which many studies pointing towards a positive response of stock returns to economic growth.  Developed financial market is likely to create a good market condition for trading the government bonds, in addition to attracting investor confidence, both of which are expected to stimulate investment on the government stock and greater returns.  Consequently, the following hypothesis is formulated:

• Ha1: The financial growth in a country has a positive association with return in sovereign bonds.

Further, developed economies tend to have greater degree of economic stability (Li et al., 2016) and higher investor confidence (Dimic et al., 2016). In light of these preliminary literatures, the direction of the relationship may favour either of the economies. The study, consequently, formulates the following possible alternate hypothesis for the cross- country study:

• Ha2: The effect of financial growth on sovereign bond returns differs between developed that in developing countries.
• H02 the effect of financial growth on sovereign bond returns has no significant variation between the developed that in developing countries.

The study will rely on the past studies to address these  suggested hypothesis.

Significance of the Study

The government bonds have always formed a crucial source of government funding.  In the recent past, more countries have resorted to bonds, notably in the Euro area during the recent wave of Euro-crisis. To win investors and international repute, countries need to invest effectively on institutional developments that would help sovereign bonds generate greater returns (Eichler & Plaga, 2016).) . This topic is therefore of vital policy interest, to the extent that it examines the factors of sovereign bond return, in this case financial developments.  Again, by examining on the variation between the relationships across various markets, the study offers further insights on how market conditions (inferred from country development classification) could