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Empirical Comparison of Robust Portfolios’ Investment Effects

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  • Bartosz Kaszuba

Abstract

The purpose of this article is to assess whether correct application of robust estimators in construction of minimum variance portfolios' (MVP) allows to achieve better investment results in comparison with portfolios defined using classical MLE estimators. Theoretical robust portfolios properties and portfolios investment effect are compared. This paper proposes a practical methodology of comparing alternative estimation methods, based on random portfolio selection. This approach enables to analyse investment effects of various portfolios. The empirical analysis shows that for MVP portfolios with nonnegative constraints created using robust methods, there is no significant risk improvement, and that even for most robust methods, there is an observable significant risk increase compared to the risk of classical portfolios. This paper also shows that robust portfolio estimators cause higher transaction cost.

Suggested Citation

  • Bartosz Kaszuba, 2012. "Empirical Comparison of Robust Portfolios’ Investment Effects," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 5(1), pages 047-061, June.
  • Handle: RePEc:rfb:journl:v:05:y:2013:i:1:p:047-061
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    7. Schäfer Juliane & Strimmer Korbinian, 2005. "A Shrinkage Approach to Large-Scale Covariance Matrix Estimation and Implications for Functional Genomics," Statistical Applications in Genetics and Molecular Biology, De Gruyter, vol. 4(1), pages 1-32, November.
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