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Dominating Estimators for Minimum-Variance Portfolios

  • Gabriel Frahm


    (University of Cologne - University of Cologne)

  • Christoph Memmel


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 and number of observations . The small-sample properties of the shrinkage estimators as well as their large-sample properties for fixed but and but 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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Paper provided by HAL in its series Post-Print with number peer-00741629.

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Date of creation: 15 Oct 2010
Date of revision:
Publication status: Published, Journal of Econometrics, 2010, 159, 2, 289
Handle: RePEc:hal:journl:peer-00741629
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  4. Vasyl Golosnoy & Yarema Okhrin, 2007. "Multivariate Shrinkage for Optimal Portfolio Weights," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 441-458.
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  15. Chan, Louis K C & Karceski, Jason & Lakonishok, Josef, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 937-74.
  16. Ravi Jagannathan & Tongshu Ma, 2003. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," Journal of Finance, American Finance Association, vol. 58(4), pages 1651-1684, 08.
  17. Okhrin, Yarema & Schmid, Wolfgang, 2006. "Distributional properties of portfolio weights," Journal of Econometrics, Elsevier, vol. 134(1), pages 235-256, September.
  18. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
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