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Title:Dominating estimators for the global minimum variance portfolio PDF Logo
Authors:Frahm, Gabriel
Memmel, Christoph
Issue Date:2009
Series/Report no.:Discussion Paper Series 2: Banking and financial studies 2009,01
Abstract:Two shrinkage estimators for the global minimum variance portfolio that dominate the traditional estimator with respect to the out-of-sample variance of the portfolio return are derived. The presented results hold for any number of observations n >= d 2 and number of assets d >= 4. The small-sample properties of the shrinkage estimators and also their large-sample properties for fixed d but n -> infinity as well as n,d -> infinity but n/d -> q <= infinity are investigated. Further, a small-sample test for the question whether it is better to completely ignore time series information in favor of naive diversification is presented.
Subjects:Covariance matrix estimation
global minimum variance portfolio
James-Stein estimation
naive diversification
shrinkage estimator
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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