Exploring the benefits of international government bond portfolio diversification strategies

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Abstract

We use the Bayesian approach of Wang(1998) to examine the diversification benefits of investing in international government bonds. We find that no short selling constraints substantially reduce but do not eliminate the diversification benefits when only investing in G7 government bonds with different maturities. There are significant diversification benefits when using the G7 bonds, an inflation-linked bond index, and emerging market bonds even in the presence of no short selling constraints. The superior performance is driven by the emerging markets bonds. We also find that the diversification benefits vary across different economic states.
Original languageEnglish
Pages (from-to)1-15
Number of pages15
JournalEuropean Journal of Finance
Volume25
Issue number1
Early online date20 Mar 2018
DOIs
Publication statusPublished - 31 Jan 2019

Keywords

  • international diversification,
  • international government bonds
  • Bayesian analysis

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