Can Microfinance Reduce Portfolio Volatility?

33 Pages Posted: 10 Nov 2006 Last revised: 4 Jan 2014

Ingo Walter

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Nicolas A. Krauss

New York University (NYU) - Wilf Family Department of Politics

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2008

Abstract

Microfinance is arguably one of the most effective techniques for poverty alleviation in developing countries. Although traditionally supported by nongovernmental organizations and socially-oriented investors, microfinance institutions (MFIs) have increasingly demonstrated their value on a stand-alone basis, typically exhibiting low default rates combined with attractive returns and growth, encouraging greater commercial involvement. This paper addresses a related issue - whether microfinance shows low correlation with international and domestic market performance measures. If so, it could form the empirical basis for MFI access to capital markets and performance-driven investors in their search for efficient portfolios. Our empirical tests do not show any exposure of microfinance institutions to global capital markets, but significant exposure regarding domestic GDP, suggesting that microfinance investments may have useful portfolio diversification value for international investors, not for domestic investors lacking significant country risk diversification options.

Keywords: microfinance, systemic risk, poverty alleviation

JEL Classification: G21, O16

Suggested Citation

Walter, Ingo and Krauss, Nicolas A., Can Microfinance Reduce Portfolio Volatility? (January 30, 2008). Available at SSRN: https://ssrn.com/abstract=943786 or http://dx.doi.org/10.2139/ssrn.943786

Ingo Walter (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0707 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Nicolas A. Krauss

New York University (NYU) - Wilf Family Department of Politics ( email )

715 Broadway
New York, NY 10003
United States

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