Testing for structural changes in large portfolios
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Date
2015
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Abstract
Model free tests for constant parameters often fail to detect structural changes in high
dimensions. In practice, this corresponds to a portfolio with many assets and a reasonable
long time series. We reduce the dimensionality of the problem by looking a compressed
panel of time series obtained by cluster analysis and the principal components of the data.
Using our methodology we are able to extend a test for a constant correlation matrix from a
sub portfolio to whole indices and exemplify the procedure with the EuroStoxx index.
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Keywords
correlation, portfolio management, cluster analysis, structural change