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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26630
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| Title: | IMPROVED ESTIMATES OF CORRELATION AND THEIR IMPACT ON THE OPTIMUM PORTFOLIOS |
| Authors: | Elton, Edwin J.
Gruber, Martin J.
Spitzer, Jonathan F. |
| Issue Date: | 2005 |
| Series/Report no.: | SC-AM-05-10 |
| Abstract: | To implement mean variance analysis one needs a technique for
forecasting correlation coefficients. In this article we investigate the
ability of several techniques to forecast correlation coefficients
between securities. We find that separately forecasting the average
level of pairwise correlations and individual pair-wise differences from
the average improves forecasting accuracy. Furthermore, forming
homogenous groups of firms on the basis of industry membership or firm
attributes (eg. Size) improves forecast accuracy. Accuracy is evaluated
in two ways: First, in terms of the error in estimating future
correlation coefficients. Second, in the characteristics of portfolios
formed on the basis of each forecasting technique. The ranking of
forecasting techniques is robust across both methods of evaluation and
the better techniques outperform prior suggestions in the literature of
financial economics. |
| URI: | http://hdl.handle.net/2451/26630 |
| Appears in Collections: | Asset Management
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