Journal of Investing, Forthcoming (1995)
Claude Erb
First Chicago Corporation, Chicago, IL 60670, USA
Campbell R. Harvey
Duke University, Durham, NC 27706, USA
National Bureau of Economic Research, Cambridge, MA 02138, USA
Tadas Viskanta
First Chicago Corporation, Chicago, IL 60670, USA
Abstract
Many active managers use state-of-the-art statistical models to forecast asset returns. Some have implemented variance forecasting models. However, less effort has been devoted to modeling correlations. The focus of our paper is on time-varying international correlations. We study how correlation is affected by the state of the economy and offer some insights into the construction of correlation forecasting models. We assess whether the hedging abilities of international capital markets for U.S. investors are different today than in the past.