Divergent estimation error in portfolio optimization and in linear regression

DOI10.1140/EPJB/E2008-00060-XzbMATH Open1189.91194arXiv0710.1855OpenAlexW3101810335MaRDI QIDQ978608FDOQ978608

Authors: I. Varga-Haszonits, Imre Kondor 

Publication date: 25 June 2010

Published in: The European Physical Journal B. Condensed Matter and Complex Systems (Search for Journal in Brave)

Abstract: The problem of estimation error in portfolio optimization is discussed, in the limit where the portfolio size N and the sample size T go to infinity such that their ratio is fixed. The estimation error strongly depends on the ratio N/T and diverges for a critical value of this parameter. This divergence is the manifestation of an algorithmic phase transition, it is accompanied by a number of critical phenomena, and displays universality. As the structure of a large number of multidimensional regression and modelling problems is very similar to portfolio optimization, the scope of the above observations extends far beyond finance, and covers a large number of problems in operations research, machine learning, bioinformatics, medical science, economics, and technology.

Full work available at URL: https://arxiv.org/abs/0710.1855

Recommendations

• Replica approach to mean-variance portfolio optimization
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Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Portfolio theory (91G10)

Cites Work

• Noisy covariance matrices and portfolio optimization. II
• Introduction to Modern Portfolio optimization with NUOPT and S-PLUS
• Risk minimization through portfolio replication

Cited In (2)

• Impacts of Measurement Errors on Simultaneous Equation Estimation of Dividend and Investment Decisions
• Replica approach to mean-variance portfolio optimization

Uses Software

• RiskMetrics

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