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Title:Dominating estimators for the global minimum variance portfolio PDF Logo
Authors:Frahm, Gabriel
Memmel, Christoph
Issue Date:2008
Series/Report no.:Discussion papers in statistics and econometrics 2/08
Abstract:In this paper, we derive 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. 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 as well as their large-sample properties for fixed d but n → ∞ as well as n/d → ∞ but n/d → q ≤ ∞ 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.
Subjects:Covariance matrix estimation
Global minimum variance portfolio
James-Stein estimation
Naive diversification
Shrinkage estimator
JEL:C13
G11
Document Type:Working Paper
Appears in Collections:Discussion Papers in Econometrics and Statistics, Institut für Ökonometrie und Statistik, Universität Köln

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