تنوع بخشی بین المللی با استفاده از بازارهای مرزی

We provide an analysis of frontier market equities with respect to world market integration and diversification. Principal component results reveal that frontier markets exhibit low levels of integration. In contrast with developed and emerging markets, frontier markets offer no indication of increasing integration through time. Furthermore, individual frontier market countries do not exhibit consistent rates of changing integration. Structural break tests identify breakpoints in integration, as well as integration dynamics across countries. We show that frontier markets have low integration with the world market and thereby offer significant diversification benefits.

We study the potential diversification benefits of frontier markets by measuring integration dynamics, as well as analyzing frontier market exchange-traded funds (ETFs). Frontier markets are smaller, less accessible, yet still investable countries in the developing world; the median market capitalization of frontier markets within our sample reached US$12.89 billion at the end of 2009. When their capital and liquidity increase, frontier markets may be reclassified as emerging markets. This designation originated in the 1990s, when Standard and Poor’s (S&P) started to track a representative index of frontier markets, then became prominent in 2007 when S&P launched its Select and Extended Frontier Indexes.1 To reflect growing investor interest in these markets, MSCI also launched a Frontier Markets Index late in 2007. Recently, frontier market mutual funds and ETFs also have emerged.2

This study considers returns from frontier market countries, as well as broad frontier market indexes. The results relate to significant prior literature that investigates levels of world market integration, as well as the diversification benefits of international investing. These two broad topics are related as finance theory implies an inverse relationship between international diversification benefits and levels of world market integration. However, we uniquely focus on frontier markets, which previously have received relatively little attention. We find little evidence of frontier market integration within the world market and a lack of consistent integration dynamics. However, our structural break models indicate periods of increasing and decreasing integration for specific frontier market countries.