How much structure is best ? A comparison of market model , factor model and unstructured equity covariance matrices

@inproceedings{Briner2008HowMS,
  title={How much structure is best ? A comparison of market model , factor model and unstructured equity covariance matrices},
  author={Beat G. Briner},
  year={2008}
}
  • Beat G. Briner
  • Published 2008
This paper compares three approaches to estimating equity covariance matrices: a factor model, a market model and an unstructured asset-byasset model. These approaches make different trade-offs between estimation variance and model specification error. We explore this trade-off with a simulation experiment and with an empirical analysis of UK equity portfolios. The factor model is found to perform best for large investment universes and typical sample lengths. The market model underperforms due… CONTINUE READING

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