Forecasting the Correlation Structure of German Stock Returns: A Test of Firm-Specific Factor Models |
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Authors: | Manfred Steiner,& Martin Wallmeier |
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Affiliation: | Department of Finance and Banking, University of Augsburg, Universitätsstrasse 2, D-86135 Augsburg, Germany, |
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Abstract: | 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 analyse 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. |
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Keywords: | portfolio management diversification factor models financial ratios, correlation structure. |
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