A Robust Statistics Approach to Minimum Variance Portfolio Optimization
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Publication:4580987
DOI10.1109/TSP.2015.2474298zbMATH Open1395.91517arXiv1503.08013MaRDI QIDQ4580987FDOQ4580987
R. Couillet, Liusha Yang, Matthew McKay
Publication date: 22 August 2018
Published in: IEEE Transactions on Signal Processing (Search for Journal in Brave)
Abstract: We study the design of portfolios under a minimum risk criterion. The performance of the optimized portfolio relies on the accuracy of the estimated covariance matrix of the portfolio asset returns. For large portfolios, the number of available market returns is often of similar order to the number of assets, so that the sample covariance matrix performs poorly as a covariance estimator. Additionally, financial market data often contain outliers which, if not correctly handled, may further corrupt the covariance estimation. We address these shortcomings by studying the performance of a hybrid covariance matrix estimator based on Tyler's robust M-estimator and on Ledoit-Wolf's shrinkage estimator while assuming samples with heavy-tailed distribution. Employing recent results from random matrix theory, we develop a consistent estimator of (a scaled version of) the realized portfolio risk, which is minimized by optimizing online the shrinkage intensity. Our portfolio optimization method is shown via simulations to outperform existing methods both for synthetic and real market data.
Full work available at URL: https://arxiv.org/abs/1503.08013
Cited In (9)
- Norm constrained minimum variance portfolios with short selling
- Title not available (Why is that?)
- A kernel-based trend pattern tracking system for portfolio optimization
- Closed-form solutions for short-term sparse portfolio optimization
- A review of Tyler's shape matrix and its extensions
- Kernel-based aggregating learning system for online portfolio optimization
- Sequential monitoring of minimum variance portfolio
- Large-scale minimum variance portfolio allocation using double regularization
- Improving portfolios global performance using a cleaned and robust covariance matrix estimate
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