Dominating estimators for minimum-variance portfolios |
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Authors: | Gabriel Frahm Christoph Memmel |
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Institution: | 1. University of Cologne, Chair for Statistics & Econometrics, Department of Economic and Social Statistics, Albertus-Magnus-Platz, D-50923 Cologne, Germany;2. Deutsche Bundesbank, Financial Stability Department, Wilhelm-Epstein-Strasse 14, D-60431 Frankfurt, Germany |
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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 d≥4 and number of observations n≥d+2. The small-sample properties of the shrinkage estimators as well as their large-sample properties for fixed d but n→∞ and 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. |
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Keywords: | C13 G11 |
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