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Can Microfinance Reduce Portfolio Volatility?

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  • Nicolas Krauss
  • Ingo Walter

Abstract

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 institutions (MFIs) have increasingly demonstrated their value on a stand-alone basis, typically exhibiting low default rates combined with attractive returns and growth, encouraging greater commercial involvement. This study addresses a related issue-whether microfinance shows low correlation with international and domestic market performance measures. If so, it could form the empirical basis for MFI access to capital markets and performance-driven investors in their search for efficient portfolios. Our empirical tests do not show any exposure of microfinance institutions to global capital markets, but significant exposure regarding domestic GDP, suggesting that microfinance investments may have useful portfolio diversification value for international investors, not for domestic investors lacking significant country risk diversification options. (c) 2009 by The University of Chicago. All rights reserved.

Suggested Citation

  • Nicolas Krauss & Ingo Walter, 2009. "Can Microfinance Reduce Portfolio Volatility?," Economic Development and Cultural Change, University of Chicago Press, vol. 58(1), pages 85-110, October.
  • Handle: RePEc:ucp:ecdecc:v:58:y:2009:i:1:p:85-110
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    References listed on IDEAS

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    1. Gonzalez, Adrian, 2007. "Resilience of Microfinance Institutions to National Macroeconomic Events: An Econometric Analysis of MFI asset quality," MPRA Paper 4317, University Library of Munich, Germany.
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    Cited by:

    1. Brière, Marie & Szafarz, Ariane, 2015. "Does Commercial Microfinance Belong to the Financial Sector? Lessons from the Stock Market," World Development, Elsevier, vol. 67(C), pages 110-125.
    2. Awaworyi Churchill, Sefa & Korankye Danso, Jeffrey & Nyatefe, Elikem, 2015. "Microfinance Institution Performance: Does the Macro-economy matter?," EconStor Preprints 123724, ZBW - German National Library of Economics.
    3. Serrano-Cinca, Carlos & Gutiérrez-Nieto, Begoña, 2014. "Microfinance, the long tail and mission drift," International Business Review, Elsevier, vol. 23(1), pages 181-194.
    4. Wagner, Charlotte & Winkler, Adalbert, 2013. "The Vulnerability of Microfinance to Financial Turmoil – Evidence from the Global Financial Crisis," World Development, Elsevier, vol. 51(C), pages 71-90.
    5. Emilios Galariotis & Christophe Villa & Nurmukhammad Yusupov, 2011. "Recent Advances in Lending to the Poor with Asymmetric Information," Journal of Development Studies, Taylor & Francis Journals, vol. 47(9), pages 1371-1390, July.
    6. Moulin, Bertrand, 2011. "Microfinance investment vehicles in Sub-Saharan Africa: constraints and potentials," MPRA Paper 32967, University Library of Munich, Germany.
    7. Dorfleitner, G. & Priberny, C., 2013. "A quantitative model for structured microfinance," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 12-22.
    8. Marie Briere & Ariane Szafarz, 2015. "Does commercial microfinance belong to the financial sector? Lessons from the stock market," Policy Papers CEB 2013/187643, ULB -- Universite Libre de Bruxelles.
    9. repec:dau:papers:123456789/14039 is not listed on IDEAS
    10. Katsushi S. Imai & Raghav Gaiha & Ganesh Thapa & Samuel Kobina Annim & Aditi Gupta, 2012. "Financial Performance of Microfinance Institutions-A Macroeconomic and Institutional Perspective," Discussion Paper Series DP2012-04, Research Institute for Economics & Business Administration, Kobe University.
    11. Ayi Gavriel Ayayi, 2012. "Microfinance: A Time to Deliberate," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(3), pages 445-447, July.
    12. Sandra, Kendo & Chicot, Eboue, 2016. "Microfinance institutional growth: How driven forces impact their financial integration?," MPRA Paper 70225, University Library of Munich, Germany.
    13. Gabriel Di Bella, 2011. "The Impact of the Global Financial Crisison Microfinance and Policy Implications," IMF Working Papers 11/175, International Monetary Fund.
    14. repec:dau:papers:123456789/7858 is not listed on IDEAS
    15. Beatriz Cuéllar-Fernández & Yolanda Fuertes-Callén & Carlos Serrano-Cinca & Begoña Gutiérrez-Nieto, 2016. "Determinants of margin in microfinance institutions," Applied Economics, Taylor & Francis Journals, vol. 48(4), pages 300-311, January.
    16. Galema, Rients & Lensink, Robert & Spierdijk, Laura, 2011. "International diversification and Microfinance," Journal of International Money and Finance, Elsevier, vol. 30(3), pages 507-515, April.
    17. repec:eee:reveco:v:53:y:2018:i:c:p:88-97 is not listed on IDEAS
    18. Cristián Pinto, 2015. "The Effect of Labor Market Flexibility on Microfinance Institutions Performance: International Evidence," Serie Working Papers 21, Universidad del Desarrollo, School of Business and Economics.

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