IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v83y2025ics0927539825000453.html
   My bibliography  Save this article

A robust latent factor model for high-dimensional portfolio selection

Author

Listed:
  • Shi, Fangquan
  • Shu, Lianjie
  • Gu, Xinhua

Abstract

Portfolio selection, faced with large volatile data sets of strongly correlated asset returns, is prone to unstable portfolio weights and serious estimation error. To attenuate this problem, our work proposes a new latent factor model equipped with both a suitable robust estimator to deal with cellwise data contamination and a diagonally-dominant (DD) covariance structure to account for cross-sectional dependence among residual returns. The proposed robust DD model is found to compare favorably with various competitors from the literature in terms of out-of-sample portfolio performance across real-world data sets.

Suggested Citation

  • Shi, Fangquan & Shu, Lianjie & Gu, Xinhua, 2025. "A robust latent factor model for high-dimensional portfolio selection," Journal of Empirical Finance, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:empfin:v:83:y:2025:i:c:s0927539825000453
    DOI: 10.1016/j.jempfin.2025.101623
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539825000453
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jempfin.2025.101623?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:83:y:2025:i:c:s0927539825000453. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jempfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.