Comparison of the behavior of markowitz model across three broad indices under different market conditions

Abstract

The Markowitz model, introduced by Harry Markowitz in 1952, forms the basis of Modern Portfolio Theory and provides a mathematical framework for investors to create well-diversified portfolios by balancing risk and return. This research investigates the performance of the Markowitz model across three major indices: Nifty 50 of India, PSEi composite of the Philippines, and Straits Times Index of Singapore, under different market conditions in different time regimes. The study covers a 15-year period starting from 2007, encompassing the global financial crisis and the COVID-19 pandemic. From each index, 20 stocks were selected based on their market capitalization. Through the application of the Markowitz mean-variance model, optimal portfolio weights were derived for different time regimes within each country. These trial period optimal weights were then applied to subsequent simulation periods for comparative analysis with the Market Capitalization Weighted Portfolio, serving as the benchmark. Performance assessments were based on the Sharpe ratio and Information ratio. Results revealed that the Markowitz model’s varied performance across market conditions in India and the Philippines whereas, in Singapore, it constantly well-performed despite the market condition due to the country’s relative stability than India and Philippines. These results suggested that the effectiveness of the model relies on the stability challenges that emerge in volatile and uncertain periods when the country is relatively unstable.