Global Financial Cycle and Sovereign Bond Yield Dynamics in Frontier Markets: Evidence from Nigeria (2010-2024)
Abstract
As financial globalization deepens, frontier economies have become increasingly exposed to external shocks driven by global risk sentiment and liquidity conditions. This study examines how global financial conditions influence sovereign bond yield dynamics in frontier markets, with a focus on Nigeria over a 14-year period (2010–2024). Anchored in the Global Financial Cycle (GFC) framework, the study evaluates the extent to which global risk (proxied by the VIX volatility index) and domestic macroeconomic variables, including the exchange rate and interest rate, shape government borrowing costs. Using a time-series econometric framework, the study employs Ordinary Least Squares (OLS) alongside unit root tests and diagnostic checks. To address potential dynamic effects, an autoregressive extension is incorporated as a robustness check. It is expected that the findings will show that global financial conditions exert a strong and statistically significant influence on sovereign bond yields. Increases in global risk aversion are expected to significantly raise borrowing costs, while exchange rate depreciation and higher domestic interest rates further amplify this effect. The results are expected to confirm the dominance of global financial factors in shaping domestic financial conditions in frontier markets and to highlight the limited capacity of domestic policy tools to offset external shocks. The study is anticipated to contribute to the literature by providing updated evidence from an African frontier economy using a transparent and policy-relevant empirical framework.