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A Portfolio Approach To Estimating The Average Correlation
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Journal Article
A Portfolio Approach To Estimating The Average Correlation
1989
Overview
A portfolio approach is developed for estimating the average of the pairwise correlations among stock returns. The approach does not require the estimation of pairwise correlations for estimating their average. For N securities in one group, the portfolio approach will estimate only N + 1 variances: the variance of N securities and the variance of a portfolio where investment in each security equals the reciprocal of its sample standard deviation. The average correlation coefficient has been shown to produce a better estimate of the future correlation matrix than individual pairwise correlations. It is hoped that the present investigation will generate more interest in the constant correlation model (CCM), which appears to have been ignored despite its advantages. The CCM uses the historical average correlation coefficient for the future.
Publisher
Blackwell Publishers Inc
Subject
