Covariance averaging for improved estimation and portfolio allocation

Fotis Papailias () and Dimitrios Thomakos
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Fotis Papailias: http://www.quantf.com

Financial Markets and Portfolio Management, 2015, vol. 29, issue 1, 59 pages

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. Copyright Swiss Society for Financial Market Research 2015

Keywords: Averaging; Covariance estimation; Portfolio allocation; Rolling window; C32; C58; G11 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Covariance Averaging for Improved Estimation and Portfolio Allocation (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:fmktpm:v:29:y:2015:i:1:p:31-59

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DOI: 10.1007/s11408-014-0242-0

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