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Abstract
The authors investigate whether the diversification benefits of frontier markets are realizable. They focus on investable frontier exchange-traded funds (ETFs) and their corresponding indices. Their analysis ncludes directly measuring the economic benefits of frontier-market diversification, as well as considering frontier-market trading dynamics. Evidence indicates that frontier markets offer diversification benefits through risk-reducing potential. The authors find that frontier market volatility tends to be largely idiosyncratic, which supports the risk-reducing role of frontier markets. Their comparison of funds and indices indicates that, to the extent that frontier-market indices offer hypothetical benefits, traders can obtain these benefits by using investable funds.
TOPICS: Exchange-traded funds and applications, volatility measures, in markets
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