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Dominating estimators for minimum-variance portfolios

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  • Frahm, Gabriel
  • Memmel, Christoph

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-->[infinity] and n,d-->[infinity] but n/d-->q

Suggested Citation

  • Frahm, Gabriel & Memmel, Christoph, 2010. "Dominating estimators for minimum-variance portfolios," Journal of Econometrics, Elsevier, vol. 159(2), pages 289-302, December.
    • Handle: RePEc:eee:econom:v:159:y:2010:i:2:p:289-302
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    More about this item

    Keywords

    Covariance matrix estimation Minimum-variance portfolio Stein estimation Naive diversification Shrinkage estimator;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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