Universal Portfolio Shrinkage

Bryan T. Kelly, Semyon Malamud, Mohammad Pourmohammadi and Fabio Trojani

No 32004, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We introduce a nonlinear covariance shrinkage method for building optimal portfolios. Our universal portfolio shrinkage approximator (UPSA) is given in closed form, is cheap to implement, and improves upon existing shrinkage methods. Rather than annihilating low-variance principal components of returns, UPSA instead reweights components to explicitly optimize expected out-of-sample portfolio performance. We demonstrate robust empirical improvements over alternative shrinkage methods in the literature.

JEL-codes: C1 C14 C53 C55 C58 G10 G11 G14 G17 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-mac
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