Shrinkage=factor model

Zura Kakushadze ()
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Zura Kakushadze: Quantigic® Solutions LLC

Journal of Asset Management, 2016, vol. 17, issue 2, No 1, 69-72

Abstract: Abstract Shrunk sample covariance matrix is a factor model of a special form combining some (typically, style) risk factor(s) and principal components with a (block-)diagonal factor covariance matrix. As such, shrinkage, which essentially inherits out-of-sample instabilities of the sample covariance matrix, is not an alternative to multifactor risk models but one out of myriad possible regularization schemes. We give an example of a scheme designed to be less prone to said instabilities. We contextualize this within multifactor models.

Keywords: shrinkage; factor models; principal components; sample covariance matrix; regularization scheme (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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DOI: 10.1057/jam.2015.40

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