Frontier Emerging Government Bond Markets

We investigate correlation dynamics and diversification properties of US dollar-denominated debt issued by governments of the next generation of emerging markets, so-called frontier markets. Our analysis is performed on the aggregate, regional, and country level, with a sample covering 29 countries over the period 2001–2013. We show that the correlation between the returns of frontier government bond markets and US government bonds is time-varying, with prolonged periods of negative correlation, but on average close to zero. Correlations with US investment grade corporate bonds, US corporate high yield bonds, and US dollar-denominated debt issued by governments of emerging markets are substantially higher. Our mean-variance spanning tests suggest that US investors who invest in US government bonds can expand the mean-variance frontier significantly by including frontier government bond markets, but this is not the case for investors who already invest in US corporate high yield bonds or US dollar-denominated emerging markets debt.

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