Estimation of the global minimum variance portfolio in high dimensions

DOI10.1016/J.EJOR.2017.09.028zbMATH Open1403.91307arXiv1406.0437OpenAlexW2963070656MaRDI QIDQ90168FDOQ90168

Wolfgang Schmid, Taras Bodnar, Nestor Parolya, Taras Bodnar, Nestor Parolya

Publication date: April 2018

Published in: European Journal of Operational Research (Search for Journal in Brave)

Abstract: We estimate the global minimum variance (GMV) portfolio in the high-dimensional case using results from random matrix theory. This approach leads to a shrinkage-type estimator which is distribution-free and it is optimal in the sense of minimizing the out-of-sample variance. Its asymptotic properties are investigated assuming that the number of assets $p$ depends on the sample size $n$ such that $fracpnightarrowcin(0,+infty)$ as $n$ tends to infinity. The results are obtained under weak assumptions imposed on the distribution of the asset returns, namely it is only required the fourth moments existence. Furthermore, we make no assumption on the upper bound of the spectrum of the covariance matrix. As a result, the theoretical findings are also valid if the dependencies between the asset returns are described by a factor model which appears to be very popular in financial literature nowadays. This is also well-documented in a numerical study where the small- and large-sample behavior of the derived estimator are compared with existing estimators of the GMV portfolio. The resulting estimator shows significant improvements and it turns out to be robust to the deviations from normality.

Full work available at URL: https://arxiv.org/abs/1406.0437

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zbMATH Keywords

covariance matrix estimationfinanceglobal minimum variance portfoliolarge-dimensional asymptoticsrandom matrix theory

Mathematics Subject Classification ID

Estimation in multivariate analysis (62H12) Applications of statistics to actuarial sciences and financial mathematics (62P05) Portfolio theory (91G10)

Cites Work

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Cited In (23)

• High-dimensional correlation matrix estimation for general continuous data with Bagging technique
• Unrestricted maximum likelihood estimation of multivariate realized volatility models
• A risk perspective of estimating portfolio weights of the global minimum-variance portfolio
• Bayesian mean–variance analysis: optimal portfolio selection under parameter uncertainty
• A test on the location of the tangency portfolio on the set of feasible portfolios
• Sampling distributions of optimal portfolio weights and characteristics in small and large dimensions
• Sample and realized minimum variance portfolios: estimation, statistical inference, and tests
• How does price (in)efficiency influence cryptocurrency portfolios performance? The role of multifractality
• Logarithmic law of large random correlation matrices
• Singular Conditional Autoregressive Wishart Model for Realized Covariance Matrices
• On the Combination of Naive and Mean-Variance Portfolio Strategies
• BAYESIAN INFERENCE FOR THE TANGENT PORTFOLIO
• Quantile-based optimal portfolio selection
• A test on mean-variance efficiency of the tangency portfolio in high-dimensional setting
• Recent advances in shrinkage-based high-dimensional inference
• Portfolio optimization for sustainable investments
• An exact test on structural changes in the weights of the global minimum variance portfolio
• A Bayesian graphical approach for large-scale portfolio management with fewer historical data
• Large-scale minimum variance portfolio allocation using double regularization
• Improving portfolios global performance using a cleaned and robust covariance matrix estimate
• The distribution of sample mean-variance portfolio weights
• Optimal Shrinkage-Based Portfolio Selection in High Dimensions
• HDShOP

Uses Software

• R
• MASS (R)

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