Co-movements between frontier and global bond markets: Exploring the dynamics of frontier bond markets

This researchscrutinizesthe dynamics of co-movements of frontier sovereign bond markets with major global bond marketsduring the period 2002-2018. This study analyzes in addition whether macroeconomic factors can explain the obtaineddynamic conditional correlationson the country level. The last step of this research tests the potential international diversification benefitsof frontier bond marketson the aggregate and regional level. This paper findssignificant time-varying correlationlevels,which areon averageclose to zerobetween frontier government bonds and US government bonds. Frontier bond markets co-move stronger with emerging government bonds, US high yield corporates, US investment grade corporates and equity markets resulting in positive correlationlevelsduring the entire sample period. The impact of macroeconomic factors is inconclusiveand can therefore notexplain the observedtime-varying co-movements.Significant diversification benefitsof frontier bond marketsarevanishedon the aggregate level by including higher yielding assets, but significant diversification benefits are present in the period after the financial crisis. In addition, the regional frontier sub-indices Europe and Africa show diversification benefits over the entire sample period. Restrictions on short-selling and incorporating transaction costs could diminish the potential diversification benefitsin the realistic investable world.