Estimating the Dependence Structure of Share Prices: A Comparative Study of the United States and Japan

Cheol S Eun and Bruce Resnick

The Financial Review, 1988, vol. 23, issue 4, 387-401

Abstract: In this paper, the authors show that estimating the correlation structure of domestic share prices via the overall mean method cannot be considered universally superior to estimation at the full historical level for all countries. Specifically, the Japanese data show that the full historical model outperforms the overall mean mode l in forecasting accuracy, while the opposite is true with the U.S. data. The authors derive a composite model that analytically explains this contrasting result. The industry mean model, which allows for efficient ex ante portfolio selection via a simple algorithm, is likely to be the best forecasting model applicable to both the U.S. and Japanese stock markets. Copyright 1988 by MIT Press.

Date: 1988
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