Size matters: Optimal calibration of shrinkage estimators for portfolio selection

Victor DeMiguel, Alberto Martin-Utrera and Francisco J. Nogales

Journal of Banking & Finance, 2013, vol. 37, issue 8, 3018-3034

Abstract: We carry out a comprehensive investigation of shrinkage estimators for asset allocation, and we find that size matters—the shrinkage intensity plays a significant role in the performance of the resulting estimated optimal portfolios. We study both portfolios computed from shrinkage estimators of the moments of asset returns (shrinkage moments), as well as shrinkage portfolios obtained by shrinking the portfolio weights directly. We make several contributions in this field. First, we propose two novel calibration criteria for the vector of means and the inverse covariance matrix. Second, for the covariance matrix we propose a novel calibration criterion that takes the condition number optimally into account. Third, for shrinkage portfolios we study two novel calibration criteria. Fourth, we propose a simple multivariate smoothed bootstrap approach to construct the optimal shrinkage intensity. Finally, we carry out an extensive out-of-sample analysis with simulated and empirical datasets, and we characterize the performance of the different shrinkage estimators for portfolio selection.

Keywords: Portfolio choice; Estimation error; Shrinkage intensity; Out-of-sample evaluation; Bootstrap (search for similar items in EconPapers)
JEL-codes: C14 G11 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426613002161
Full text for ScienceDirect subscribers only

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: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:8:p:3018-3034

DOI: 10.1016/j.jbankfin.2013.04.033

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().