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

Author

Listed:
  • Dolinar Denis

    (University of Zagreb, Faculty of Economics & Business, Croatia)

  • Zoričić Davor

    (University of Zagreb, Faculty of Economics & Business, Croatia)

  • Golubić Zrinka Lovretin

    (University of Zagreb, Faculty of Economics & Business, Croatia)

Abstract

In the field of portfolio management the focus has been on the out-of-sample estimation of the covariance matrix mainly because the 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 whether risk measures can be used as proxies for the expected return in the stock market. In this research, we test the standard deviation (measure of total volatility) and the semi-deviation (measure of downside risk) as proxies for the expected market return in the illiquid and undeveloped Croatian stock market in the period from January 2005 until November 2017. In such an environment, the application of the proposed methodology yielded poor results, which helps explain the failure of the out-of-sample estimation of the maximum Sharpe ratio portfolio in earlier research in the Croatian equity market.

Suggested Citation

  • Dolinar Denis & Zoričić Davor & Golubić Zrinka Lovretin, 2019. "Application of semi-deviation as a proxy for the expected return estimation in the Croatian equity market," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 5(1), pages 9-20, May.
    • Handle: RePEc:vrs:crebss:v:5:y:2019:i:1:p:9-20:n:2
    DOI: 10.2478/crebss-2019-0002
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    expected return estimation; illiquid and undeveloped equity market; semi-deviation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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