Can Microfinance Reduce Portfolio Volatility?
United States of America, June, 05 2007 -
This paper from Nicolas A. Krauss and Ingo Walter analyses microfinance's correlation with international and domestic market performance measures.
Microfinance is arguably one of the most effective techniques for poverty alleviation in developing countries. Although traditionally supported by nongovernmental organizations and socially-oriented investors, microfinance has increasingly demonstrated its value on a stand-alone basis, typically exhibiting low default rates combined with attractive returns, encouraging greater commercial involvement. This paper addresses a related issue – whether microfinance shows low correlation with international and domestic market performance measures, thereby forming the basis for access to global capital markets and performance-driven investors in their search for efficient portfolios. Our empirical tests generally show very low exposure of microfinance institutions to general market movements, suggesting that microfinance portfolios may have useful portfolio diversification value.