Linear statistical inference for global and local minimum variance portfolios
Traditional portfolio optimization has been often criticized since it does not account for estimation risk. Theoretical considerations indicate that estimation risk is mainly driven by the parameter uncertainty regarding the expected asset returns rather than their variances and covariances. This is also demonstrated by several numerical studies. The global minimum variance portfolio has been advocated by many authors as an appropriate alternative to the traditional Markowitz approach since there are no expected asset returns which have to be estimated and thus the impact of estimation errors can be substantially reduced. But in many practical situations an investor is not willing to choose the global minimum variance portfolio, especially in the context of top down portfolio optimization. In that case the investor has to minimize the variance of the portfolio return by satisfying some specific constraints for the portfolio weights. Such a portfolio will be called 'local minimum variance portfolio'. Some finite sample hypothesis tests for global and local minimum variance portfolios are presented as well as the unconditional finite sample distribution of the estimated portfolio weights and the first two moments of the estimated expected portfolio returns.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: 0221 / 470 5607|
Phone: 0221 / 470 5607
Fax: 0221 / 470 5179
Web page: http://www.wisostat.uni-koeln.de/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alexander Kempf & Christoph Memmel, 2006. "Estimating the global Minimum Variance Portfolio," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 58(4), pages 332-348, October.
- Klein, Roger W. & Bawa, Vijay S., 1976. "The effect of estimation risk on optimal portfolio choice," Journal of Financial Economics, Elsevier, vol. 3(3), pages 215-231, June.
- Okhrin, Yarema & Schmid, Wolfgang, 2006. "Distributional properties of portfolio weights," Journal of Econometrics, Elsevier, vol. 134(1), pages 235-256, September.
When requesting a correction, please mention this item's handle: RePEc:zbw:ucdpse:107. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.