| dc.description.abstract | This study is purposed to test the efficiency of the Kenyan Treasury Bills Market. It tests how
accurate forward rates are in predicting the expected spot rates and is founded on the unbiased
expectations theory.
The data used consist of weekly yields on 91-day and I 82-day T-Bills over the six year period
from is February 2002 to 17th March 2008. Using first test of ANOYA we determine
whether the 91-day and 182-day Treasury bills are different. We again use ANOYA for 91-
Days TB Lag and Forward Rate Lag to test whether the forward rate is equal to the expected
spot rate. Finally we run the regression model to find out the change in future spot rate when
forward rate changes by 1. This helps determine whether the relationship between future spot
rate and forward rate is statistically significant.
We find that 91-day and 182 day T-Bills appear different in line with the theory that assets of
longer maturity tend to give higher returns as compensation. We also find that forward rate
tends to be higher than the comparable spot rate suggesting the existence of forward
premiums. The regression co-efficient, P-value of 0.000, show that the relationship IS
statistically significant i.e. you can use forward rates to predict future spot rates.
The implication is that market players would not achieve much trying to predict future spot
rates using the forward rates alone. The CBK should develop a model that incorporates
forward rate and other macro-economic factors to predict more accurately the future spot rate;
as we find that the forward rates have incremental information for the future changes in the
spot exchange rates, given that they move towards the same direction. This would guide
investors in their decision to invest in the Kenya Treasury Bills.
This study will pay attention to the cross-interest rates and cross-maturity term structures of the
forward premium to assess if at all they contain information that can be useful in predicting
future spot interest rates.
A forward interest rate is the rate one can lock in now for a commitment to buy a one-period
bond in the future. This leads naturally to the hypothesis that forward rates forecast future spot
(one period) interest rates. Early tests of this hypothesis largely use US Treasury bills, and the
results are rather negative.
A market is efficient if nobody can obtain extraordinary profit in the long run by using publicly
available information (Fama, 1965). Gross (1983) summarize the conditions to be fulfilled if the
market is to be efficient: the market is competitive, information is costless to acquire; the market
participants have the capacity to effectively use the information; transaction costs is zero; and no
non-random innovation between contract time and actual delivery. | en |
