 Understanding the Impact of Weights Constraints in Portfolio TheoryMPRA Paper from University Library of Munich, Germany Abstract: In this article, we analyze the impact of weights constraints in portfolio theory using the seminal work of Jagannathan and Ma (2003). They show that solving the global minimum variance portfolio problem with some constraints on weights is equivalent to use a shrinkage estimate of the covariance matrix. These results may be easily extended to mean variance and tangency portfolios. From a financial point of view, the shrinkage estimate of the covariance matrix may be interpreted as an implied covariance matrix of the portfolio manager. Using the universe of the DJ Eurostoxx 50, we study the impact of weights constraints on the global minimum variance portfolio and the tangency portfolio. We illustrate how imposing lower and upper bounds on weights modify some properties of the empirical covariance matrix. Finally, we draw some conclusions in the light of recent developments in the asset management industry. Keywords: global minimum variance portfolio; Markowitz optimization; tangency portfolio; Lagrange coefficients; shrinkage methods; covariance matrix (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:36753 Access Statistics for this paper More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC. |
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