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

Denis Dolinar Davor Zorièiæ Antonija Kožul
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Denis Dolinar Davor Zorièiæ Antonija Kožul: University of Zagreb, Faculty of Economics & Business, Zagreb, Croatia University of Zagreb, Faculty of Economics & Business, Zagreb, Croatia McKinsey & Company - Global management consulting, Zagreb, Croatia
Authors registered in the RePEc Author Service: Davor Zoričić ()

Zagreb International Review of Economics and Business, 2017, vol. 20, issue SCI, 13-23

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 (Zorièiæ et al., 2014). JEL Classification: G11, G12

Keywords: efficient benchmark; cap-weighted indices; risk-return trade-off; undeveloped and illiquid markets (search for similar items in EconPapers)
Date: 2017
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