Portfolio Selection and VaR Estimation: Evidence from Western Balkan Countries

Abstract

The risk-return relationship is an analysis especially for the investors who are risk aversion. In this context, their decision to invest in an investment strategy is a complex process. This complexity is larger for financial capital markets which are not very liquid. Hence, the aim of this study is the analysis of stock exchange capitalization in the Western Balkans Region, and the possibility of building an efficient frontier curve of investments, and finding the optimal potential portfolio. In this study, we analyzed the daily stock quotations of the five Western Balkan countries which are not members of the European Union, and these data are proceeded by five indexes with the official daily publications of quotations. The time-series data are divided into three semi-annual (2019 and 2020). The analysis also has calculations in terms of return on the capital distribution as well as the risk level. Realizing this major purpose used Lagrange multipliers and interpolating polynomial methods, which have generated the efficient frontier curves. Whereas, determining the profit or loss intervals based on the risk point used VaR and CVaR estimation techniques according to the Monte Carlo simulation for geometric Brownian motion for the historical data of daily logarithmic returns. The major hypothesis in this study finds out that the stock exchange indexes of the Western Balkans Region are not efficient (in the equilibrium) because an optimal portfolio cannot be found according to the active investing, nevertheless exists a possibility diversification only for the passive investing.