engleski

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

The main focus in the field of portfolio management has been on the out-of-sample estimation of covariance matrix mainly due to the fact that estimation of expected return is much more challenging. However, recent research efforts have not only tried to improve the estimation of risk parameters by expanding the analysis beyond the mean-variance setting but also by testing if risk measures can be used as a proxy for the expected return in the stock market. Following Martellini (2008) and Amenc et al. (2010) we test semi-deviation as a measure of downside risk as a proxy for the expected market return in the illiquid and undeveloped Croatian stock market. For the 2005-2016 period we conduct multiple out-of-sample estimations of expected market return by randomly choosing stocks from the market universe and for the CROBEX index constituents alone. As expected in an illiquid and undeveloped environment the application of proposed methodology yielded poorer results. However, results help explain the failure of out-of-sample estimation of maximum Sharpe ratio portfolio by Dolinar et al. (2017) and propose further testing in order to fully assess the potential use in the analysed environment.

expected return estimation, illiquid and undeveloped equity market

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