<abstract xmlns="http://www.w3.org/1999/xhtml"><bold>Background:</bold> Investors on financial markets are interested in finding trading strategies which could enable them to beat the market. They always look for best possibilities to achieve above-average returns and manage risks successfully. MGARCH methodology (Multivariate Generalized Autoregressive Conditional Heteroskedasticity) makes it possible to model changing risks and return dynamics on financial markets on a daily basis. The results could be used in order to enhance portfolio formation and restructuring over time.<bold>Objectives:</bold> This study utilizes MGARCH methodology on Croatian financial markets in order to enhance portfolio selection on a daily basis. Methods/Approach: MGARCH methodology is applied to the stock market index CROBEX, the bond market index CROBIS and the kuna/euro exchange rate in order to model the co-movements of returns and risks on a daily basis. The estimation results are then used to form successful portfolios.<bold>Results:</bold> Results indicate that using MGARCH methodology (the CCC and the DCC model) as guidance when forming and rebalancing a portfolio contributes to less portfolio volatility and greater cumulated returns compared to strategies which do not take this methodology into account.<bold>Conclusions:</bold> It is advisable to use MGARCH methodology when forming and rebalancing portfolios in terms of portfolio selection.</abstract>

Background: Investors on financial markets are interested in finding trading strategies which could enable them to beat the market. They always look for best possibilities to achieve above-average returns and manage risks successfully. MGARCH methodology (Multivariate Generalized Autoregressive Conditional Heteroskedasticity) makes it possible to model changing risks and return dynamics on financial markets on a daily basis. The results could be used in order to enhance portfolio formation and restructuring over time.Objectives: This study utilizes MGARCH methodology on Croatian financial markets in order to enhance portfolio selection on a daily basis. Methods/Approach: MGARCH methodology is applied to the stock market index CROBEX, the bond market index CROBIS and the kuna/euro exchange rate in order to model the co-movements of returns and risks on a daily basis. The estimation results are then used to form successful portfolios.Results: Results indicate that using MGARCH methodology (the CCC and the DCC model) as guidance when forming and rebalancing a portfolio contributes to less portfolio volatility and greater cumulated returns compared to strategies which do not take this methodology into account.Conclusions: It is advisable to use MGARCH methodology when forming and rebalancing portfolios in terms of portfolio selection.

Dynamic Portfolio Selection on Croatian Financial Markets: MGARCH Approach

Faculty of Economics and Business, University of Zagreb,

Business Systems Research Journal

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Dynamic Portfolio Selection on Croatian Financial Markets: MGARCH Approach"}

Background: Investors on financial markets are interested in finding trading strategies which could enable them to beat the market. They always look for best...

Dynamic Portfolio Selection on Croatian Financial Markets: MGARCH Approach

Published Online: Oct 17, 2016

Page range: 78 - 90

Received: Jan 20, 2016

Accepted: Jul 21, 2016

DOI: https://doi.org/10.1515/bsrj-2016-0014

Keywords
Zagreb Stock Exchange, DCC and CCC GARCH, risk hedging, volatility

© 2016 Tihana Škrinjarić et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Dynamic Portfolio Selection on Croatian Financial Markets: MGARCH Approach

Published Online: Oct 17, 2016

Page range: 78 - 90

Received: Jan 20, 2016

Accepted: Jul 21, 2016

DOI: https://doi.org/10.1515/bsrj-2016-0014

KeywordsZagreb Stock Exchange, DCC and CCC GARCH, risk hedging, volatility

© 2016 Tihana Škrinjarić et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
Zagreb Stock Exchange, DCC and CCC GARCH, risk hedging, volatility