Is the Diversification Benefit of Frontier Markets Realizable by Mean-Variance Investors? The Evidence of Investable Funds

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.