Improved Estimates of Correlation Coefficients and Their Impact on the Optimum Portfolios

28 Pages Posted: 3 Nov 2008

See all articles by Edwin J. Elton

Edwin J. Elton

New York University (NYU) - Department of Finance

Martin J. Gruber

New York University (NYU) - Department of Finance

Jonathan F. Spitzer

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 2004

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 pair-wise 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.

Suggested Citation

Elton, Edwin J. and Gruber, Martin J. and Spitzer, Jonathan F., Improved Estimates of Correlation Coefficients and Their Impact on the Optimum Portfolios (September 2004). NYU Working Paper No. FIN-04-016. Available at SSRN: https://ssrn.com/abstract=1294451

Edwin J. Elton (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0361 (Phone)
212-995-4233 (Fax)

Martin J. Gruber

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0333 (Phone)
212-995-4233 (Fax)

Jonathan F. Spitzer

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4349822681 (Phone)
4342434351 (Fax)

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