Forecasting the Correlation Structure of German Stock Returns: A Test of Firm-Specific Factor Models
University of Fribourg - Faculty of Economics and Social Science
University of Augsburg
European Financial Management, Vol. 5, No. 1, March 1999
This paper evaluates the performance of various factor models with firm-specific variables in forecasting correlation matrices at the German stock market. We investigate forecasts of correlations for a comprehensive sample and a sample of blue chips and analyze the impact of stock market crashes on the forecasting accuracy. Our empirical results show that the multi-factor models do not generally produce better forecasts than 'naive' models. Specifically, the traditional Industry Mean Model significantly outperforms all other techniques in most of the time periods.
JEL Classification: G11, G53, G23Accepted Paper Series
Date posted: October 22, 1998
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