GDP-linked bonds and their diversification benefits

This thesis examines the diversification benefits of simulated GDP-linked bonds issued by Greece and the Netherlands for the period 2002-2013 and under different portfolio investment strategies. The diversification effects are investigated based on correlations of GDP growth rate with the world, Eurozone, advanced economies and emerging markets and developing economies. It provides evidence that no significant diversification properties arise from portfolios consisted of simulated GDP-linked bonds and government bonds of each country or portfolios consisted of GDP-linked bonds from Greece and the Netherlands respectively. Nevertheless, diversification occurs when simulated Greek GDP-linked bonds are combined with GDP-linked bonds issued by advanced economies (before the start of the financial crisis) and with GDP-linked bonds issued by emerging markets and developing economies (after the start of the financial crisis). Diversification also exists when combining Dutch GDP-linked bonds with GDP-linked bonds issued by emerging markets and developing economies for both the investigated periods. However for the latter, the observed diversification decreases after the start of the financial crisis.