Large Scale Covariance Estimates for Portfolio Selection

Francesco Lautizi ()
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Francesco Lautizi: DEF, Università di Roma "Tor Vergata", http://www.ceistorvergata.it

No 353, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: We propose an estimator of the Covariance Matrix (SWSE) of a large number of assets. This estimator improves the Similarity Weighted Estimator (SWE) introduced in Munnix et al. (2014), by combining it with the shrinkage estimator of the sample covariance matrix towards the market factor developed by Ledoit and Wolf (2003). We compare the performance of our estimator to some alternatives already available form the literature and the industry. For this purpose we analyse both statistical and economic measures associated to the Global Minimum Variance (GMV) Portfolio, composed by the stocks included in the S&P 500 index and computed using the different estimators considered in our comparison.

Keywords: Portfolio selection; large scale covariance matrix; precision matrix; shrinkage; minimum variance; market dynamics (search for similar items in EconPapers)
JEL-codes: C55 C58 G11 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2015-08-07, Revised 2015-08-07
New Economics Papers: this item is included in nep-ecm and nep-ger
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