Improved estimation of the covariance matrix of stock returns with an application to portfolio selection

Journal of Empirical Finance

Volumn 10, Issue 5, 2003, Pages 603-621

  Ledoit, Olivier ^a,b   Wolf, Michael ^c  

^a UNIVERSITY OF CALIFORNIA   (United States)

^b Credit Suisse group   (Switzerland)

^c DEPARTMENT OF ECONOMICS AND BUSINESS   (Spain)

Author keywords

Covariance matrix estimation; Factor models; Portfolio selection; Shrinkage method

Indexed keywords

EID: 0041841552     PISSN: 09275398     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0927-5398(03)00007-0     Document Type: Article

References (25)

1. Bender S. Blin J. Arbitrage and the structure of risk: a mathematical analysis Modern Finance 1997 1-32
2. Bollerslev T.-R. Engle R. Nelson D. A capital asset pricing model with time varying covariances Journal of Political Economy 96 1988 116-131
3. Connor G. Korajczyk R.A. A test for the number of factors in an approximate factor model Journal of Finance 48 1993 1263-1291
4. Connor G. Korajczyk R.A. The arbitrage pricing theory and multifactor models of asset returns In: Jarrow R. Maksimovic V. Ziemba W. (Eds.), Finance Handbook 1995 North-Holland Amsterdam Chapter 4
5. Efron B. Morris C. Stein's paradox in statistics Scientific American 237 1977 119-127
6. Elton E.J. Gruber M.J. Estimating the dependence structure of share prices Journal of Finance 28 1973 1203-1232
7. Fama E.F. French K.R. Industry costs of equity Journal of Financial Economics 43 1997 153-193
8. Fama E.F. MacBeth J. Risk, return and equilibrium: empirical tests Journal of Political Economy 81 1973 607-636
9. Frost P.A. Savarino J.E. An empirical Bayes approach to portfolio selection Journal of Financial and Quantitative Analysis 21 1986 293-305
10. Jobson J.D. Korkie B. Estimation for Markowitz efficient portfolios Journal of the American Statistical Association 75 1980 544-554 (Applications Section)
11. Jorion P. Bayes-Stein estimation for portfolio analysis Journal of Financial and Quantitative Analysis 21 1986 279-292
12. Kahn, R., 1994. The E3 project. Barra Newsletter, Summer 1994, p. 11 (available at http://www.barra.com/Research_Library/BarraPub/te3p-n.asp.
13. Kandel S. Stambaugh R.F. Portfolio inefficiency and the cross-section of expected returns Journal of Finance 50 1995 157-184
14. Ledoit, O., Wolf, M., 2000. A well-conditioned estimator for large dimensional covariance matrices. Working paper, Departamento de Estadística y Econometría, Universidad Carlos III de Madrid.
15. Lo A. MacKinlay A.-C. When are contrarian profits due to stock market overreactions Review of Financial Studies 3 1990 175-208
16. Markowitz H. Portfolio selection Journal of Finance 7 1952 77-91
17. Michaud R.O. The Markowitz optimization enigma: is 'optimized' optimal? Financial Analysts Journal 45 1989 31-42
18. Muirhead R.J. Developments in eigenvalue estimation Advances in Multivariate Statistical 1987 277-288
19. Roll R. A critique of the asset pricing theory's test: Part I. On past and potential testability of the theory Journal of Financial Economics 4 1977 129-176
20. Roll R. Ross S.A. An empirical investigation of the arbitrage pricing theory Journal of Finance 35 1980 1073-1103
21. Rosenberg B. Extra-market components of covariance in security returns Journal of Financial and Quantitative Analysis 9 1974 263-273
22. Ross S.A. The arbitrage theory of capital asset pricing Journal of Economic Theory 13 1976 341-360
23. Shanken J. Nonsynchronious data and the covariance-factor structure of returns Journal of Finance 42 1987 221-232
24. Sharpe W.F. A simplified model for portfolio analysis Management Science 9 1963 277-293
25. Stein C. Inadmissibility of the usual estimator for the mean of a multivariate normal distribution In: Neyman J. (Eds.), Proceedings of the Third Berkeley Symposium on Mathematical and Statistical Probability 1956 197-206 University of California Berkeley Volume 1