Paper

The Problems of Correlation in the Financial Risk Management- The Contribution of Microfinance

Using MFIs as an alternative investment instrument

This study analyzes risk characteristics and performance of selected microfinance investment funds (MIVs) against given equity and fixed income indices over a defined study period.

The study examines whether MIVs show any significant correlation with global developed markets as well as emerging markets. If they do not, MIVs could represent a valuable portfolio diversification opportunity. Recent research that focused on this unique potential of MFIs for portfolio enhancement and diversification revealed that:

  • MFIs are not correlated with global capital markets in terms of absolute market risk interconnection;
  • MFIs are significantly less correlated to global market risk than other emerging market financial institutions and businesses, in relative terms, compared to benchmark institutions;
  • MFIs may have useful diversification value for international portfolio investors;
  • Domestic microfinance investments do not seem to provide significant portfolio diversification for emerging market domestic investors.

Finally, microfinance may be attractive for investors seeking a better risk-return profile. Microfinance could also be valuable as an addition to the debt part of a globally diversified portfolio.

About this Publication

By Janda, K. & Svárovská, B.
Published