Japan Short-Term Equity Model (JPE3S): A Highly Responsive Risk Model for Japan

Apr 2, 2004

This report introduces the Japan Short-Term Equity Model, JPE3S, a model for near-term (several month) Japanese equity risk. JPE3S responds more quickly to changes in risk levels than the Japan Equity Model, JPE3. In order to make more responsive risk forecasts, JPE3S employs daily returns data and accounts for their serial correlations. Daily data provide denser and more detailed intra-horizon volatility information than would be available from monthly returns, and allow the model to base its forecasts on a relatively short data history. Serial correlations are significant in aggregating daily factor returns to longer horizons; incorporating them substantially enhances model performance.