Arbeitspapier
Nonlinear shrinkage of the covariance matrix for portfolio selection: Markowitz meets Goldilocks
Markowitz (1952) portfolio selection requires estimates of (i) the vector of expected returns and (ii) the covariance matrix of returns. Many proposals to address the first question exist already. This paper addresses the second question. We promote a new nonlinear shrinkage estimator of the covariance matrix that is more flexible than previous linear shrinkage estimators and has 'just the right number' of free parameters (that is, the Goldilocks principle). In a stylized setting, the nonlinear shrinkage estimator is asymptotically optimal for portfolio selection. In addition to theoretical analysis, we establish superior real-life performance of our new estimator using backtest exercises.
- Language
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Englisch
- Bibliographic citation
-
Series: Working Paper ; No. 137
- Classification
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Wirtschaft
Estimation: General
Portfolio Choice; Investment Decisions
- Subject
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Large-dimensional asymptotics
Markowitz portfolio selection
nonlinear shrinkage
- Event
-
Geistige Schöpfung
- (who)
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Ledoit, Olivier
Wolf, Michael
- Event
-
Veröffentlichung
- (who)
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University of Zurich, Department of Economics
- (where)
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Zurich
- (when)
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2014
- DOI
-
doi:10.5167/uzh-90273
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Ledoit, Olivier
- Wolf, Michael
- University of Zurich, Department of Economics
Time of origin
- 2014
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