Abstract
M.Com. (Finance)
The past decade has seen a drastic increase in the globalisation of financial markets which, in turn, has resulted in the increase in global financial market integration. This has made it progressively more difficult for effective diversification to exist and as a result, portfolio managers are in need of alternative diversification opportunities. An examination of the existing literature suggests that developed financial markets are more likely to be integrated with one another and that better diversification opportunities may be found in emerging markets with specific reference to South Africa. Furthermore, it is evident that a limited body of research exists that focuses on bond market diversification. The limited research that does exist either, does not include South Africa as a diversification destination or, takes the viewpoint of the South African investor.
The study therefore, examines whether developed market bond market investors could use South African bonds to diversify their portfolios. This was achieved primarily through a cointegration analysis between the South African bond market and five developed bond markets, namely; Germany, Norway, Sweden, the UK and the USA. Preliminary testing was conducted by means of a Granger Causality Test after which a Vector Autoregressive (VAR) methodology was employed from which a Johansen Cointegration Test was used to empirically test the long-run relationships between the bond markets. Finally, Innovation Accounting models in the form of Impulse Responses and a Variance Decomposition were employed to test their short-run relationships.
Overall, findings indicated that there was no cointegrating relationship between the South African bond market and the five developed bond markets, indicating that diversification may be possible in the long-term. Furthermore, it was found that the South African bonds were less effected by short-term shocks compared to the developed market bonds. These results provide evidence that diversification into South African bonds is possible and that it is beneficial for developed bond market investors to hold South African bonds.