Frontier Market Transaction Costs and Diversfication

Abstract

Frontier markets, sometimes referred to as “emerging emerging markets,” have high transaction costs so investors who rebalance their portfolios monthly do not receive diversification benefits. However, diversification gains can be achieved by investors rebalancing every three months or longer. The diversification benefits we document are based on comprehensive measures of transaction costs using tick data for 19 frontier markets that are readily accessible to foreign investors. Our results cover the 2002-2010 period and apply to investors who add frontier market exposure to U.S. portfolios and portfolios with U.S. and emerging market exposure.

Keywords: Frontier market, liquidity, transaction cost, diversification

JEL Classification: G11, G15