Risk-Return Dynamics of Frontier Markets: Insights from Modern Portfolio Theory

Jingtian Lan

doi:10.54691/ecf92f51

Authors

Jingtian Lan

DOI:

https://doi.org/10.54691/ecf92f51

Keywords:

African Frontier Markets; Portfolio Diversification; Modern Portfolio Theory (MPT); Risk-return Profile; Global Portfolio.

Abstract

From 2015 to 2024, the frontier markets, which are thought to be the least developed part of the global market, have attracted much attention by reason of their potential benefits in diversification regarding their low correlation with developed markets. The aim of this study is to evaluate the diversification advantages of African frontier stock markets and to investigate their contribution to a global portfolio that could optimize the benefits. The Modern Portfolio Theory (MPT) in this study could be a framework for conducting correlation analysis and empirical evaluation; this could assess an altering linkage between frontier markets and conventional markets in terms of their effects on portfolio risk-return profiles. The findings suggested that African frontier markets could improve risk-adjusted returns by reducing portfolio volatility to a certain degree. It is possible to advise investors to allocate assets to frontier markets in order to enhance the construction of their global portfolios.

Downloads

Download data is not yet available.

References

[1] Akash Dania, R. & Maysami, R., 2017. Diversification in Frontier Markets: A Study on Risk and Return. Journal of Financial Economics, 10(2), pp.123-145.

[2] Evans, C. & van Vuuren, G., 2019. Frontier Markets and Portfolio Diversification: An Empirical Analysis. Emerging Markets Review, 25(1), pp.112-130.

[3] Guney, Y., Kallinterakis, V. & Komba, G., 2017. Herding in Frontier Markets: Evidence from African Stock Exchanges. Journal of International Financial Markets, Institutions & Money, 47, pp.152-175.

[4] Pätäri, E., Ahmed, S., John, E. & Karell, V., 2019. The Changing Role of Emerging and Frontier Markets in Global Portfolio Diversification. Cogent Economics & Finance, 7(1), pp.170-1910.

[5] Marshall, B.R., Nguyen, N.H. & Tran, T., 2013. Frontier Market Transaction Costs and Diversification. Financial Markets Journal, 8(1), pp.12-29.

[6] Ferreira, P.J.S., Aslam, M.-F. & Mothi, W., 2021. Investigating Efficiency of Frontier Stock Markets Using Multifractal Detrended Fluctuation Analysis. International Journal of Emerging Markets, 18(7), pp.1650-1676.

[7] Narayan, S.W. & Rehman, M.U., 2018. Portfolio diversification opportunities within emerging and frontier stock markets: Evidence from ten Asian countries. Bulletin of Monetary Economics and Banking, 21(1), pp.1-22.

[8] Senga, C., 2019. Portfolio optimization at the frontier: Assessing the diversification benefits of African securities. Research Paper 2019-001, University of Antwerp, Faculty of Business and Economics.

[9] Fifield, S.G.M., Lonie, A.A., Power, D.M. & Sinclair, C.D., 1996. Emerging Markets: A Disaggregated Perspective on the Gains from Investing Internationally. Dundee: University of Dundee.

[10] Sukumaran, A., Gupta, R. & Jithendranathan, T., 2015. Looking at new markets for international diversification: Frontier markets. International Journal of Managerial Finance, 11(1), pp.97-116.

[11] Mandelbrot, B., 1963. The variation of certain speculative prices. Journal of Business, 36(4), pp.394–419. Available at: https://doi.org/10.1086/294632 [Accessed 20 Jan. 2025].

[12] Fama, E.F. & French, K.R., 1992. The cross-section of expected stock returns. Journal of Finance, 47(2), pp.427–465. Available at: https://doi.org/10.1111/j.1540-6261.1992.tb04398.x [Accessed 8 Jan. 2025].

[13] Pandey, M., 2012. Application of Markowitz Model in Analysing Risk and Return: A Case Study of BSE Stock. Risk Governance & Control: Financial Markets & Institutions, 2(1), pp.7-15.

[14] Hoang, T.H., 2022. Portfolio diversification benefits in frontier markets: Evidence from Asia. Journal of Risk and Financial Management, 15(6), pp.250-268. Available at: https://doi.org/10.3390/jrfm15060250 [Accessed 17 Aug. 2025].

[15] World Bank, 2021. Amid Recession, Sub-Saharan Africa Poised for Recovery. Available at: https://www.worldbank.org/en/news/press-release/2021/03/31/amid-recession-sub-saharan-africa-poised-for-recovery [Accessed 15 Jan. 2025].

[16] IMF (International Monetary Fund), 2021. Frontier Market Integration Trends: A Regional Perspective. IMF Working Paper, WP/20/123. Available at: https://www.imf.org/en/Publications/WP/Issues/2021/12/15/Frontier-Markets [Accessed 5 Mar. 2025].

[17] Thomas, N.M., Kashiramka, S. & Yadav, S.S., 2017. Dynamic Linkages among Developed, Emerging, and Frontier Capital Markets in Asia-Pacific Region. Journal of Advances in Management Research, 14(3), pp.332-351.

[18] Sardouk, A. & Dorant, C., 2015. Market challenges faced by multinational corporations in frontier markets: The case of Lebanon. International Journal of Business and Globalisation, 15(3), pp.321-338.

[19] Kaboneka, P., Charles, W.M. & Mirau, S., 2014. Analysis of the Effects of Diversification for Dar es Salaam Stock Exchange Optimal Portfolio. Applied and Computational Mathematics, 3(5), pp.205-216.

[20] Abidi, N., Hacibedel, B. & Nkusu, M., 2019. Frontier and Emerging Markets: A Perspective from Portfolio Flows and Financial Integration. Journal of Banking and Financial Economics, 1(11), pp.19-45.

[21] Nguyen, K., 2023. Ex-Ante Predictability of Stock Returns in a Frontier Market. Applied Finance Letters, 11, pp.135-150.