Frontier Markets: Punching Below Their Weight? A Risk Parity Perspective on Asset Allocation

Posted: 27 Jan 2012

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department

Date Written: December 1, 2011

Abstract

Are frontier markets the next emerging markets? And if so, should global equity investors include them in their portfolios? From a risk parity perspective, investors could benefit from a frontier markets allocation well in excess of the market weight of the asset class. A risk parity portfolio tends to outperform a market cap-weighted portfolio during periods of positive equity returns while delivering comparable returns during crisis periods. Even if portfolio managers could not follow a risk parity asset allocation strategy due to benchmark tracking considerations, overweighting frontier markets could help them outperform their benchmarks during upside periods without increasing downside risks significantly.

Keywords: frontier markets, equity markets, asset allocation, risk parity, equity portfolios

JEL Classification: G11, G15, F13

Suggested Citation

Chan-Lau, Jorge Antonio, Frontier Markets: Punching Below Their Weight? A Risk Parity Perspective on Asset Allocation (December 1, 2011). Available at SSRN: https://ssrn.com/abstract=1992118 or http://dx.doi.org/10.2139/ssrn.1992118

Jorge Antonio Chan-Lau (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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