On the benefits of equicorrelation for portfolio allocation

Clements, Adam, Scott, Ayesha, & Silvennoinen, Annastiina (2015) On the benefits of equicorrelation for portfolio allocation. Journal of Forecasting, 34(6), pp. 507-522.

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The importance of modelling correlation has long been recognised in the field of portfolio management, with largedimensional multivariate problems increasingly becoming the focus of research. This paper provides a straightforward and commonsense approach toward investigating a number of models used to generate forecasts of the correlation matrix for large-dimensional problems.We find evidence in favour of assuming equicorrelation across various portfolio sizes, particularly during times of crisis. During periods of market calm, however, the suitability of the constant conditional correlation model cannot be discounted, especially for large portfolios. A portfolio allocation problem is used to compare forecasting methods. The global minimum variance portfolio and Model Confidence Set are used to compare methods, while portfolio weight stability and relative economic value are also considered.

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ID Code: 84947
Item Type: Journal Article
Refereed: Yes
Keywords: volatility, multivariate GARCH, portfolio allocation
DOI: 10.1002/for.2357
ISSN: 0277-6693
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2015 John Wiley & Sons, Ltd.
Deposited On: 23 Jun 2015 22:14
Last Modified: 25 Jun 2017 00:03

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