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Extension of random matrix theory to the L-moments for robust portfolio allocation

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Abstract

In this paper, we propose a methodology for building an estimator of the covariance matrix. We use a robust measure of moments called L-moments (see hosking, 1986), and their extension into a multivariate framework (see Serfling and Xiao, 2007). Random matrix theory (see Edelman, 1989) allows us to extract factors which contain real information. An empirical study in the American market shows that the Global Minimum L-variance Portfolio (GMLP) obtained from our estimator well performs the Global Minimum Variance Portfolio (GMVP) that acquired from the empirical estimator of the covariance matrix.

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  • Ghislain Yanou, 2008. "Extension of random matrix theory to the L-moments for robust portfolio allocation," Documents de travail du Centre d'Economie de la Sorbonne bla08103, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:bla08103
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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2008/Bla08103.pdf
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    Keywords

    Covariance matrix; Lvariance-covariance; Lcorrelation; concomitance; random matrix theory.;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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