International Bond Diversification Strategies; The Impact of Currency, Country, and Credit Risk
49 Pages Posted: 13 Jan 2008 Last revised: 22 Feb 2008
Date Written: February 20, 2008
Abstract
We investigate the incremental role of emerging market debt and corporate bonds in internationally diversified government bond portfolios. Contrary to earlier results, we find that international diversification among government bonds does not yield significant diversification benefits. This result is obtained using mean-variance spanning and intersection tests, with restrictions for short sales, both for currency unhedged and hedged international developed market government bonds. Currency hedged international corporate bonds in turn do offer some diversification benefits, and emerging market debt in particular significantly shifts the mean-variance frontier for a developed market investor. Since especially unconstrained mean-variance spanning and intersection tests can indicate significant diversification benefits, but lead to frontier portfolios with extreme weights, we also consider some ex-ante global government bond portfolio strategies. We find that passive global benchmarks such as GDP-weighed government bond portfolios perform quite well within developed countries.
Keywords: International Bond Diversification, Emerging market debt, Corporate bonds
JEL Classification: G11, G15, F34
Suggested Citation: Suggested Citation
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