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

Open access

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).

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Amenc N. Goltz F. & Martellini L. (2013). Smart Beta 2.0. Nice France: EDHEC-Risk Institute.

  • Amenc N. Goltz F. Martellini L. & Retkowsky P. (2011). Effi cient Indexation: An Alternative to Cap-Weighted Indices. The Journal of Investment Management. 9(4) 1-23.

  • Fama E. F. & French K. R. (1992). The cross-section of expected stock returns. The Journal of Finance. 47(2) 427-465. DOI: 10.1111/j.1540-6261.1992.tb04398.x.

  • Grinold R. C. (1992). Are Benchmark Portfolios Effi cient? The Journal of Portfolio Management. 19(1) 34-40. DOI: 10.3905/jpm.1992.34.

  • Haugen R. A. & Baker N. L. (1991). The Effi cient Market Ineffi ciency of Capitalization-Weighted Stock Portfolios. The Journal of Portfolio Management. 17(3) 35-40. DOI: 10.3905/jpm.1991.409335.

  • Ledoit O. & Wolf M. (2004). Honey I shrunk the sample covariance matrix. The Journal of Portfolio Management. 30(4) 110-119. DOI: 10.3905/jpm.2004.110.

  • Markowitz H. M. (1959). Portfolio Selection: Effi cient Diversifi cation of Investments. New York USA: John Wiley & Sons Inc.

  • Martellini L. (2008). Toward the Design of Better Equity Benchmarks: Rehabilitating the Tangency Portfolio from Modern Portfolio Theory. The Journal of Portfolio Management. 34(4) 34-41. DOI: 10.3905/jpm.2008.709978.

  • ScientificBeta. (2016 December). ERI Scientifi c Beta Universe Construction Rules. Retrieved February 27 2017 from http://www.scientificbeta.com/download/file/grd-universe

  • Sharpe W. F. (1963). A Simplifi ed Model of Portfolio Analysis. Management Science. 9(2) 277-293. DOI: 10.1287/mnsc.9.2.277.

  • Sharpe W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance. 19(3) 425-442. DOI: 10.1111/j.1540-6261.1964.tb02865.x.

  • Zoričić D. Dolinar D. & Kožul A. (2014). The Market Index Benchmark and Adequate Compensation for Systematic Risk in an Illiquid and Undeveloped Financial Market. In D. Miloš Sprčić (Eds.) Risk management: Strategies for Economic Development and Challenges in the Financial System (pp. 257-277). New York USA: Nova Science Publishers Inc.

Suche
Zeitschrifteninformation
Cited By
Metrics
Gesamte Zeit Letztes Jahr Letzte 30 Tage
Abstract Views 0 0 0
Full Text Views 202 111 2
PDF Downloads 130 89 1