A Post-Modern Portfolio Management Approach on CEE Markets
Abstract
In this paper we apply two methods based on the Post-Modern Portfolio Management approach to study the risk-adjusted return of 5 major indices from emerging markets in Central and Eastern Europe during the period 2008-2013 on daily data. First, we involve the Sortino ratio. Secondly we propose an alternative method to the Sortino ratio for calculating the risk-adjusted return using a “multipliers method†to determine a global measure of risk.
The Sortino ratio is used to score a portfolio's risk-adjusted returns relative to an investment target using downside risk and it measures the risk-adjusted return of an investment asset, portfolio or strategy. Our proposed alternative method is using the same logic and frame structure as Sortino ratio. However instead of downside risk we use the global risk calculated using multipliers. This is due to the fact that Sortino ratio does not distinguish between sub-cases possible – unrealized return area and loss area (negative return). Because of these we believe that it would be necessary a new method which to refine the results and take and into account the three areas.
Our dataset includes 5 emerging markets: Romania (BET), Hungary (BUX), Czech Republic (PX),
Bulgaria (SOFIX) and Poland (WIG). For each of them we estimate the Sortino ratio of length windows 7, 14, 42 and 10, 21, 60. We used two variants for each target return, namely 2% and 5%. We consider Germany as a benchmark.
After estimating the Sortino ratio and global risk calculated using “multipliers methodâ€, we conducted a parallel analysis between Sortino ratio and the proposed alternative method. We split the analysis time span in two sub-periods, 2008-2010 and 2011-2013.
As known, the higher the Sortino ratio, the better the risk-adjusted performance. The risk-adjusted return is influenced by the used target return and the used window. Analyzed data reveals that in case of Sortino ratio, Hungary has the best results and on the other side, Bulgaria has the worst results - regardless the window size or target return. In case of the alternative method, the best results are obtained on Hungary capital market and the worst results on Bulgaria and Poland capital market. Also, the analysis performed on the two sub-periods, 2008-2010 and 2011-2013, highlights the fact that Central and Eastern Europe emerging markets have experienced the crisis of 2008 with a delay.
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