An enhanced Gerber statistic for portfolio optimization

William Smyth and Daniel Broby

Finance Research Letters, 2022, vol. 49, issue C

Abstract: The purpose of this letter is to introduce a modified version of the Gerber statistic resulting in the enhancement of its function as a measure of statistical co-movement. The modification centres around the redefinition of zones and thresholds, alongside the use of finite real-valued contributions rather than discrete binary counts in assigning value to individual co-movements. Arguments for the former are based on the statistical alignment of data series for the purposes of more effectively delineating concordant and discordant co-movement. Arguments for the latter are based on attributing greater weight to better information. Collectively this approach simultaneously incorporates the merits of Gerber-like thresholds and zoning, and conventional correlation-like co-movement measurement.

Keywords: Estimation error; Gerber statistic; Portfolio optimization; Shrinkage; Equity co-movements; Modern portfolio theory (search for similar items in EconPapers)
JEL-codes: G00 G1 G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322004317

DOI: 10.1016/j.frl.2022.103229

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