International Diversification and Microfinance
Utrecht University - Utrecht University School of Economics
University of Groningen - Department of Economics, Econometrics and Finance; Wageningen UR - Development Economics Group
University of Groningen
October 19, 2008
International commercial banks, institutional investors, and private investors have become increasingly interested in financing microfinance institutions (MFIs). This paper investigates whether adding microfinance funds to a portfolio of risky international assets yields diversification gains. By using mean-variance spanning tests with short-sale constraints, the paper indicates that investing in microfinance may be attractive for investors seeking a better risk-return profile. More specifically, the analysis suggests that investing in MFIs from Latin America, or microfinance and rural banks may yield more efficient portfolios. In contrast, adding MFIs from Africa or microfinance NGOs to a benchmark portfolio of international assets does not seem beneficial for a mean-variance investor.
Number of Pages in PDF File: 20
Keywords: Microfinance, Spanning, International Diversification
JEL Classification: E44, G20, O16
Date posted: October 20, 2008
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