Abstract
The increase in globalisation of financial markets has given rise to increased integration of developed financial markets. As a result, portfolio managers are finding it increasingly difficult to diversify their portfolios across developed bond markets. Examination of existing literature suggests that using emerging financial markets as an alternative investment destination may be beneficial for a portfolio manager. However, research shows that there is limited academic research focusing on international bond portfolio diversification from the viewpoint of a South African investor using emerging financial markets.
The study examines cointegration between the South African bond market and selected emerging markets: Brazil, Russia, India and China, for the period January 2006 to February 2016. The Johansen test of cointegration and vector autoregressive (VAR) methodology was used. Overall results confirmed that there was no cointegration present among these bond markets and thus a South African portfolio manager can use these selected emerging markets for portfolio diversification and risk reduction purposes.
In addition, results proved that international bond market diversification is beneficial for a South African portfolio manager and since international bond market linkages have remained weak with no observable trend, international bond market diversification will remain beneficial for South African investors in the future.
M.Com. (Financial Management)