Measuring Dynamics of Risk and Performance of Sector Indices on Zagreb Stock Exchange

Abstract

Investors are interested in sector diversification on stock markets among other important portfolio topics. This paper looks at five sector indices on Croatian capital market as an example of a small, relatively illiquid market. Sector indices have been constructed at the beginning of 2013 and since then there is a lack of studies, which focus on sector diversification on Zagreb Stock Exchange (ZSE). Thus, the purpose of this paper is to evaluate the recent dynamics of risk and performance of five sector indices on ZSE by employing MGARCH (Multivariate Generalized Autoregressive Conditional Heteroskedasticity) models empirically. Output from the analysis is used to form guidance for investors on Croatian capital market. The results indicate that in the observed period from February 4th 2013 to October 13th 2015 portfolios based on MGARCH methodology outperform other portfolios in terms return and risk. Thus, it is advisable to use this methodology when making portfolio selection.

Keywords

• mgarch
• croatian capital market
• time varying risk
• beta
• performance measurement
• g11
• c58
• c32