engleski

A TEST OF GLOBAL MINIMUM VARIANCE PORTFOLIO IN THE CROATIAN CAPITAL MARKET

Research for the developed markets present a breakthrough in efficient asset allocation as optimization techniques are introduced which are able to generate portfolios able to outperform a market-capitalization weighted index presenting a counterpart. Similar attempts have either not yet been tested in the Croatian capital market or have failed, as in the case of Maximum Sharpe Ratio (MSR) portfolio estimation, which can be attributed to the illiquid and undeveloped market. However, research can be found suggesting that it makes sense to use Global Minimum Variance (GMV) portfolio as a proxy for the optimal benchmark portfolio (MSR) if the out-of-sample estimation of such benchmark involves a high level of estimation risk. In this paper we explore this possibility with the main goal of testing an investment strategy which could offer a better risk-reward ratio to investors relative to CROBEX index. The research examined CROBEX index revisions in the period from March 2005 till September 2017 and the results show an improvement over MSR portfolio out-of-sample estimation. However, overall the improvement is still not significant enough to outperform the cap-weighted CROBEX index. Also, the results vary significantly with the change in restrictions imposed on the portfolio weights in the optimization process. The greatest concern regarding this issue is that the increase in performance can occur at the expense of level of deconcentration in portfolio which can be significantly below the level of CROBEX index leading to high exposures to few stocks, especially in undeveloped market. Moreover, unlike for the developed markets our findings suggest that it is not possible to improve portfolio performance (and therefore also its’ deconcentration) by combining GMV portfolio with MSR or naïve, equally-weighted portfolios. However, based on the obtained results and other research we propose approaches to efficient benchmark estimation which could be used in combination with the GMV portfolio.

minimum variance portfolio, efficient asset allocation, undeveloped and illiquid markets

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