The integration of financial markets and optimal portfolio allocations and diversification strategies remain subjects of intense interest in international finance. Yet, fixed income markets have taken a backseat compared to equity markets in the field. This is largely undeserved; given the size and prominence of these markets and the asset allocation share fixed income assets hold in the portfolios of investors, particularly with institutional investors. Given that the recent financial crisis originated in a subpart of fixed income markets (subprime and mortgage bonds), and has via the balance sheets of financial institutions rolled into a sovereign bond crisis, the urgency for more research on the financial integration and institutional investor behavior in fixed income markets is greater than ever.
The research subjects of international financial integration and portfolio diversification are strongly interrelated. Integrated financial markets are a prerequisite for diversified international investment portfolios. In turn, the extent in which portfolios are diversified is indicative for the degree of financial integration that has been achieved. The desire to increase financial benefits from more optimal portfolio allocations is often a leading force in the further breakdown of any remaining barriers between national financial markets. In this sense there is an ongoing dynamic interaction between financial integration and international diversification. New techniques have in the past decade been developed in the dual study of international financial integration and the benefits of international portfolio diversification. Erasmus School of Economics (ESE) is at the forefront of applying these new techniques to fixed income markets in an econometric-empirical research setting. The novelty in this research is that new and promising techniques in the field are adapted and applied to fixed income markets.