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Detecting structural changes in large portfolios

Author

Listed:
  • Peter N. Posch

    (TU Dortmund University)

  • Daniel Ullmann

    (TU Dortmund University)

  • Dominik Wied

    (University of Cologne)

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 at a compressed panel of time series obtained by cluster analysis and the principal components of the data. With this procedure, we can extend tests for constant correlation matrix from a sub-portfolio to whole indices, which we exemplify using a major stock index.

Suggested Citation

  • Peter N. Posch & Daniel Ullmann & Dominik Wied, 2019. "Detecting structural changes in large portfolios," Empirical Economics, Springer, vol. 56(4), pages 1341-1357, April.
    • Handle: RePEc:spr:empeco:v:56:y:2019:i:4:d:10.1007_s00181-017-1392-5
    DOI: 10.1007/s00181-017-1392-5
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    References listed on IDEAS

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    Cited by:

    1. Ji-Eun Choi & Dong Wan Shin, 2021. "A self-normalization break test for correlation matrix," Statistical Papers, Springer, vol. 62(5), pages 2333-2353, October.
    2. Florian Stark & Sven Otto, 2020. "Testing and Dating Structural Changes in Copula-based Dependence Measures," Papers 2011.05036, arXiv.org.

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    More about this item

    Keywords

    Correlation; Structural change; Cluster analysis; Portfolio management;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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