Covariance averaging for improved estimation and portfolio allocation

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• 作者：Fotis Papailias (1) (2)
  Dimitrios D. Thomakos (1) (3) (4)
  
  1. Quantf Research ; Belfast ; UK
  2. Queen鈥檚 University Management School ; Queen鈥檚 University Belfast ; Riddel Hall ; 185 Stranmillis Road ; BT9 5EE ; Belfast ; Northern Ireland ; UK
  3. Department of Economics ; University of Peloponnese ; Peloponnese ; Greece
  4. Rimini Center for Economic Analysis ; Rimini ; Italy
  
• 关键词：Averaging ; Covariance estimation ; Portfolio allocation ; Rolling window ; C32 ; C58 ; G11
• 刊名：Financial Markets and Portfolio Management
• 出版年：2015
• 出版时间：February 2015
• 年：2015
• 卷：29
• 期：1
• 页码：31-59
• 全文大小：294 KB
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• 刊物主题：Business/Management Science, general; Finance/Investment/Banking; Management/Business for Professionals;
• 出版者：Springer US
• ISSN：1555-497X

文摘

We propose a new method for estimating the covariance matrix of a multivariate time series of financial returns. The method is based on estimating sample covariances from overlapping windows of observations which are then appropriately weighted to obtain the final covariance estimate. We extend the idea of (model) covariance averaging offered in the covariance shrinkage approach by means of greater ease of use, flexibility and robustness in averaging information over different data segments. The suggested approach does not suffer from the curse of dimensionality and can be used without problems of either approximation or any demand for numerical optimization.