ESTIMATION OF OPTIMAL PORTFOLIO WEIGHTS

Yarema Okhrin () and Wolfgang Schmid ()
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Yarema Okhrin: Department of Statistics, European University Viadrina, Frankfurt (Oder), Germany
Wolfgang Schmid: Department of Statistics, European University Viadrina, Frankfurt (Oder), Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2008, vol. 11, issue 03, 249-276

Abstract: The paper discusses finite sample properties of optimal portfolio weights, estimated expected portfolio return, and portfolio variance. The first estimator assumes the asset returns to be independent, while the second takes them to be predictable using a linear regression model. The third and the fourth approaches are based on a shrinkage technique and a Bayesian methodology, respectively. In the first two cases, we establish the moments of the weights and the portfolio returns. A consistent estimator of the shrinkage parameter for the third estimator is then derived. The advantages of the shrinkage approach are assessed in an empirical study.

Keywords: Optimal portfolio weights; finite sample moments; shrinkage (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S0219024908004798

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