The driving force behind the Maltese corporate bond market

Abstract

The bond market provides an effective alternative to traditional bank financing for both corporations and governments. When corporations issue bonds, they are able to borrow from the general public at a lower interest rate than the rate that is offered by banks.

This study focuses on how the corporate bond market in Malta has developed over the past decade, and how determinants such as economic factors, financial factors, and those related to the population in general have shaped this growth. Past data for the years 2008 – 2017 is collected from the Malta Stock Exchange, the National Statistics Office in Malta, and the European Central Bank.

This research takes a quantitative approach, where the data is analysed using the Classic Linear Regression Model (CLRM). The market capitalisation of the corporate bond market in Malta was regressed against GDP, inflation, interest rate, EURIBOR, volume traded, market capitalisation of equity, and market capitalisation of sovereign bonds. The regression results show how each independent variable affects the development of the corporate bond market, as measured by the market capitalisation.

The main findings of this study are that GDP, the market capitalisation of the equity market, the market capitalisation of the government bond market, and volume of corporate bonds traded affect the corporate bond market development positively, with the volume traded having the largest effect. GDP, the development of the equity market, and the development of the government bond market had the second, third, and least effects – respectively. The interest rate affects the corporate bond market development negatively with a very large coefficient of circa 10 billion. The inflation rate and EURIBOR were insignificant, probably due to the high multicollinearity that is present between these two rates.