Performance of Risk Measures in Portfolio Construction on Central and South-East European Emerging Markets

Abstract

Aim of this paper is to characterize different risk measures in portfolio construction on seven Central and South-East European stock markets; Slovenia, Croatia, Hungary, Poland, Chez Republic, Romania and Turkey. Selected countries are members of EU, except Croatia and Turkey which have candidate status. Empirical part of this paper consists of three stages; at first descriptive statistics on stock returns was performed, afterwards different risk measures were employed in portfolio construction and in the last part, portfolios were tested in the out-of-sample period. Results indicate presence of extreme kurtosis and skewness in stock return series. Resulting portfolios incorporate stocks with extremely high kurtosis and stocks with negative skewness. Portfolio construction based only on risk and return results in major exposure to extreme returns and unsatisfactory portfolio out-of-sample results.

Efficiency and transparency effects on Eastern European financial markets

“…Our research agrees with previous studies (Vidovic 2011) that risk and liquidity of stocks have become one of the most important problems in Eastern European financial markets since the financial crisis. Their risk measure (Vidovic 2011) is based on variance, semi-variance, lower partial moment, mean absolute deviation and conditional value at risk.…”

“…This article relates to a number of studies (Lang 2011;Ivanov et al 2012;Chan et al 2013;Albu et al 2015) that deal with financial liquidity and volatility specificities in emerging markets. We focus on the Eastern European area because we suggest that it occupies a very important place in modern globalization processes (Allen et al 2010;Vidovic 2011;Ivanov et al 2012).…”

“…Their risk measure (Vidovic 2011) is based on variance, semi-variance, lower partial moment, mean absolute deviation and conditional value at risk. Such Eastern European countries like Poland, Turkey, Hungary and Slovenia are in the low risk level, whereas Romania and the Czech Republic are characterized by high risk levels (Vidovic 2011). Thus, high and positive coefficients of stocks reflected the current crisis situation in Eastern European financial markets and showed very little diversification.…”

Portfolio Construction by Using Different Risk Models: A Comparison among Diverse Economic Scenarios

“…When making comparisons of outcomes from all models it can be mentioned that the models with two measures of risk most often provide better outcomes than the models with only one risk measure (Gluzicka 2010). Vidovic (2011) conducts a study by characterizing various risk indicators in portfolio composition on seven European stock markets. He identifies that extreme kurtosis and skewness exist in stock returns.…”