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

Using MFIs as an alternative investment instrument
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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.