New approach to the assessment of portfolio long-term correlation

Authors: Barysheva A. E., Markov A. S., Mitsel A. A.

Annotation: A new approach to the portfolio long-term correlation assessment is proposed in this paper which allows obtaining the long term correlation estimate based on a short term correlationtion. The advantage of proposed model is that it can be used for non liquid financial instruments and instruments which are new to the market market, as it enables estimatestimating the model parameters based on a restricted number of asset price observations. The numer ical experiment described in this paper shows the model parameters converge to the true values with increasing number of the observations. The proposed model was applied to the real data of three Russian companies to obtain the curve that describes the ass ets correlation dependency on a holding period. Also, for the portfolio considered, the correlation trix of one month returns is obtained.

Keywords: long-term correlation, portfolio management, correlation matrix modeling