Dominating Estimators for Minimum-Variance Portfolios

Gabriel Frahm () and Christoph Memmel
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Gabriel Frahm: Universität zu Köln = University of Cologne

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Abstract: In this paper, we derive two shrinkage estimators for minimum-variance portfolios that dominate the traditional estimator with respect to the out-of-sample variance of the portfolio return. The presented results hold for any number of assets and number of observations . The small-sample properties of the shrinkage estimators as well as their large-sample properties for fixed but and but are investigated. Furthermore, we present a small-sample test for the question of whether it is better to completely ignore time series information in favor of naive diversification.

Keywords: C13; G11; Covariance matrix estimation; Minimum-variance portfolio; James-Stein estimation; Naive diversification; Shrinkage estimator (search for similar items in EconPapers)
Date: 2010-10-15
Note: View the original document on HAL open archive server: https://hal.science/hal-00741629v1
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Citations: View citations in EconPapers (69)

Published in Econometrics, 2010, 159 (2), pp.289. ⟨10.1016/j.jeconom.2010.07.007⟩

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Journal Article: Dominating estimators for minimum-variance portfolios (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00741629

DOI: 10.1016/j.jeconom.2010.07.007

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