Dominating estimators for minimum-variance portfolios
In this paper, we derive two shrinkage estimators for minimum-variance portfolios that dominate the traditional estimator with respect to the out-of-sample variance of the portfolio return. The presented results hold for any number of assets d>=4 and number of observations n>=d+2. The small-sample properties of the shrinkage estimators as well as their large-sample properties for fixed d but n-->[infinity] and n,d-->[infinity] but n/d-->q<=[infinity] are investigated. Furthermore, we present a small-sample test for the question of whether it is better to completely ignore time series information in favor of naive diversification.
Year of publication: |
2010
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Authors: | Frahm, Gabriel ; Memmel, Christoph |
Published in: |
Journal of Econometrics. - Elsevier, ISSN 0304-4076. - Vol. 159.2010, 2, p. 289-302
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Publisher: |
Elsevier |
Keywords: | Covariance matrix estimation Minimum-variance portfolio Stein estimation Naive diversification Shrinkage estimator |
Saved in:
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