CONSTANT CORRELATION MODEL FOR OPTIMAL PORTFOLIO FORMATION AND EXPECTED SHORTFALL RISK MEASUREMENT: EMPIRICAL EVIDENCE FROM INDONESIAN STOCK MARKET

Febrina Devita, Yuciana Wilandari and Di Asih I Maruddani
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Febrina Devita: Department of Statistics, Diponegoro University, Semarang, Indonesia.
Yuciana Wilandari: Department of Statistics, Diponegoro University, Semarang, Indonesia.
Di Asih I Maruddani: Department of Statistics, Diponegoro University, Semarang, Indonesia.

Studii Financiare (Financial Studies), 2023, vol. 27, issue 3, 25-39

Abstract: Stock investment is one option of investment choice with risks. Investors can reduce their risk by combining several stocks and then forming a portfolio. One method to form an optimal portfolio is by using the Constant Correlation Model (CCM) method. The CCM method focuses on the correlation between stocks and the Excess Return to Standard Deviation (ERS) value. Calculation of risk in the portfolio can use the Expected Shortfall (ES) method. ES is defined as a loss with a value exceeding VaR. ES is considered appropriate for measuring portfolio risk compared to VaR because it fulfils the subadditivity property. The subadditivity shows the advantage of portfolio formation. The object of this research is to form an optimal portfolio using the CCM method and ES risk measure on the Indonesian Stock Market Indices, that is IDX30 index. The daily return of IDX30 Index is analysed for the period January 2021 - December 2022. The formed portfolio contains 3 stocks, namely BMRI with a weight of 46.263%, KLBF of 39.255%, and MDKA of 14.482%. The Expected Shortfall value at a trust level of 95% is 5.408% for the next week.

Keywords: cut off rate; excess return to standard deviation; IDX30; Monte-Carlo simulation; optimum weight (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Date: 2023
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