Dominating estimators for the global minimum variance portfolio

Gabriel Frahm and Christoph Memmel ()

No 2009,01, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre

Abstract: Two shrinkage estimators for the global minimum variance portfolio that dominate the traditional estimator with respect to the out-of-sample variance of the portfolio return are derived. The presented results hold for any number of observations n >= d 2 and number of assets d >= 4. The small-sample properties of the shrinkage estimators and also their large-sample properties for fixed d but n -> infinity as well as n,d -> infinity but n/d -> q <= infinity are investigated. Further, a small-sample test for the question whether it is better to completely ignore time series information in favor of naive diversification is presented.

Keywords: Covariance matrix estimation; global minimum variance portfolio; James-Stein estimation; naive diversification; shrinkage estimator (search for similar items in EconPapers)
JEL-codes: C13 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-rmg
Date: 2009

Downloads: (external link)
http://hdl.handle.net/10419/27684 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:zbw:bubdp2:200901

Access Statistics for this paper

More papers in Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre
Contact information at EDIRC.
Series data maintained by ZBW - German National Library for Economics ().