Covariance Averaging for Improved Estimation and Portfolio Allocation

Dimitrios Thomakos and Fotis Papailias ()
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Fotis Papailias: Queen's University Management School, Queen's University Belfast, UK; Quantf Research, Greece

Working Paper series from Rimini Centre for Economic Analysis

Abstract: We propose a new method for estimating the covariance matrix of a multivariate time series of financial returns. The method is based on estimating sample covariances from overlapping windows of observations which are then appropriately weighted to obtain the final covariance estimate. We extend the idea of (model) covariance averaging offered in the covariance shrinkage approach by means of greater ease of use, flexibility and robustness in averaging information over different data segments. The suggested approach does not suffer from the curse of dimensionality and can be used without problems of either approximation or any demand for numerical optimization.

Keywords: averaging; covariance estimation; financial returns; multivariate time series; portfolio allocation; risk management; rolling window (search for similar items in EconPapers)
JEL-codes: C32 C58 G11 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-ecm and nep-ore
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http://www.rcea.org/RePEc/pdf/wp66_13.pdf (application/pdf)

Related works:
Journal Article: Covariance averaging for improved estimation and portfolio allocation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:66_13

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