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Towards the Estimation of an Efficient Benchmark Portfolio: The Case of Croatian Emerging Market

Abstract

The fact that cap-weighted indices provide an inefficient risk-return trade-off is well known today. Various research approaches evolved suggesting alternative to cap-weighting in an effort to come up with a more efficient market index benchmark. In this paper we aim to use such an approach and focus on the Croatian capital market. We apply statistical shrinkage method suggested by Ledoit and Wolf (2004) to estimate the covariance matrix and follow the work of Amenc et al. (2011) to obtain estimates of expected returns that rely on risk-return trade-off. Empirical findings for the proposed portfolio optimization include out-of-sample and robustness testing. This way we compare the performance of the capital-weighted benchmark to the alternative and ensure that consistency is achieved in different volatility environments. Research findings do not seem to support relevant research results for the developed markets but rather complement earlier research (Zoričić et al., 2014).

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Performance Analysis of Fundamentally-Weighted Indices in the Croatian Capital Market

Zagreb. Dolinar, D., Zoričić, D. & Kožul, A. (2017). Towards the Estimation of an Efficient Benchmark Portfolio: The Case of Croatian Emerging Market. Zagreb International Review of Economics & Business. 20 (s1), 13-23. DOI: 10.1515/zireb-2017-0002. Fama, E. F. & French, K. R. (1993). Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics. 33 (1), 3-56. DOI: 10.1016/0304-405X(93)90023-5 Fama, E. F. & French, K. R. (1996). Multifactor Explanations of Asset Pricing Anomalies. Journal of Finance. 51 (1), 55–84. DOI: 10

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Application of semi-deviation as a proxy for the expected return estimation in the Croatian equity market

, Vol. 4, No. 2, pp. 101-112. 14. Dolinar, D., Orsag, S., Sudar, A. (2014). Macroeconomic factors and stock returns – evidence from Croatian stock market. In: WDSI 2014 proceedings: Western Decision Sciences Institute forty third annual meeting Napa, California: Western Decision Sciences Institute. 15. Dolinar, D., Zoričić, D., Kožul, A. (2017). Towards the Estimation of an Efficient Benchmark Portfolio: The Case of Croatian Emerging Market. Zagreb international review of economics & business, Vol. 20, No. S1, pp. 13-24. 16. Džaja, J., Aljinović

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