Fundamental Indexation for Developed, Emerging, and Frontier Government Bond Markets

Abstract

We examine the risk and return characteristics of fundamental weighting schemes for developed, emerging, and frontier government bond markets; and compare these to market capitalization weighted indexes. We document positive excess returns for the investment grade sample only when currency risks are not hedged, suggesting that fundamentals might be more important for currency rather than bond returns. For emerging and frontier markets, we find positive excess returns for fundamental weighting schemes, although not always statistically significant. The excess returns from fundamental weighting schemes for government bonds can be explained by standard factors from equity, currency, or bond markets.

Keywords: Bond Markets, Currencies, Emerging Markets, Fixed Income, Investing

JEL Classification: F30, F31, F34, G11, G12, G14, G28