engleski

PERFORMANCE ANALYSIS OF FUNDAMENTALLY-WEIGHTED INDICES IN THE CROATIAN CAPITAL MARKET

The work of Arnott et al. (2005) presented an interesting fact that the fundamentally- weighted indices generally outperform the market capitalization-weighted counterparts in the US stock market. Research results supported the view that cap-weighted indices are not mean-variance efficient and prompted the introduction of fundamentally-weighted indices in the US market. Since the research by Zoričić et al. (2014) and Habibović et al. (2017) dealing with Croatian capital market also points out the inefficiency of the risk return trade-off of the cap-weighted (CROBEX) index this paper examines more closely the risk return characteristics of the potential fundamentally-weighted alternative as proposed in Kovačević et al. (2017). Following the research of Amenc et al. (2008b) in order to compare the two benchmarks we analyze the source of higher returns in the case of fundamentally-weighted indices. To this purpose we use the original and propose a modified Fama French three factor model in order to try to capture specific sources of risk in the small and illiquid market following the research of Dolinar (2015). We find evidence in support of the view that better risk return trade-off of the fundamentally-weighted indices is driven by additional exposure to risk factors in comparison to CROBEX index.

fundamentally-weighted indices, risk-return trade-off, benchmark efficiency

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