A measure of the degree of linear association between a pair of random variables.

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226 views

Covariance estimation: shrinkage, random matrix theory, what else?

Shrinkage was much en-vogue before random matrix theory (RMT) took everybody's attention in covariance matrix estimation, however the latter also showed its limits. A plethora of other estimators has ...
6
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230 views

Stress testing covariance

Going one level beyond stressed scenarios, to parameters e.g. for a VaR measure: what are the most common approaches for stressing a covariance/correlation matrix, especially taking portfolio exposure ...
5
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304 views

Analyzing the angle between vector of weights and vector of returns in mean-variance optimization

I am using the paper "A Sharper Angle on Optimization" by Golts and Jones (2009) as a basis for my (minor) masters thesis in mathematical finance. The paper focuses on the mean-variance analysis of ...
3
votes
0answers
55 views

Finding mean vector and covariance matrix for annual returns given quarterly returns

I am currently trying to calculate a vector for the mean annual returns of 4 different asset classes along with their 4x4 covariance matrix in excel. However, I am having problems since the data I ...
3
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173 views

Should I use Resampling or Expectation Maximization to compute a robust covariance matrix?

I have several assets, each with different return histories. Some of the assets have 75 days of return history, others have 40 or so days. In calculating a robust covariance matrix, should I be using ...
2
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28 views

Ledoit-Wolf, expected order of optimal shrinkage intensity

I have a question regarding the optimal shrinkage intensity derived in the Ledoit-Wolf method. Specifically, I'm referring to their version concerned with the target defined as the single index factor ...
2
votes
0answers
27 views

Using Kendall rank correlation to construct a covariance matrix?

I am wondering if it's mathematically 'correct' to employ a correlation matrix based on Kendall-correlation when constructing a covariance matrix? I.e., is it wrong to multiply standard deviations of ...
2
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0answers
38 views

How to calculate the estimation error of portfolio variance using propagation results?

I am trying to find a conservative approximation for the propagated estimation error of a investment portfolio's variance (comprising two assets), given we know the estimation error for the variance ...
2
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207 views

Good criteria to sort state-space $\beta_{t}$ according to Kalman filter output

Let the usual state-space linear model (without constant term for the sake of simplicity): $y_{t}=\beta_{t} X_{t}+\epsilon_{t}$ If we use Gaussian Kalman filter to estimate $\beta_{t}$ we get $P_{t}$...
1
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39 views

Marchenko–Pastur, Student distribution and returns

I have a question regarding random matrix theory. I've been studying various papers and I found some confusing definitions of Marchenko-Pastur law. The most clear was the one on wiki: wiki-Pastur-...
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54 views

Fourier transform covariance estimator

I am estimating realized variance and covariance by the estimator described in this paper, and relying on Fourier Transform. Now, as my data is one day of data in ultra high frequency, so that the ...
1
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28 views

Portfolio Hedging under Uncertain Correlations

I have a portfolio ($w_0=1$) and two hedging assets ($w_1,w_2$) and a co-variance matrix for the three $\Sigma$. However the co-variance $\Sigma$ is only an estimate. For fairly well behaved assets ...
1
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174 views

How to calculate beta against a multi-asset benchmark

Lets say that I have a benchmark, $BM$ that consists of 3 assets- 30% asset $A$, 30% asset $B$ and 40% asset $C$. Now, lets further assume I am trying to construct a portfolio that uses $BM$ as its ...
1
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112 views

modeling regime switching for Correlation matrix

I am trying to estimate covariance in multiple time series. However, I want to do this using a regime-switching framework. So, I start with fitting a GARCH(1,1) model and then de-volatalize the series....
0
votes
0answers
14 views

shrinkage intensity via tawny

I'm attempting to generate a shrunked covariance matrix using the tawny package according to the Ledoit-Wolf method. However, I'm getting an odd result for the shrinkage factor using shrinkage....