I have a historical covariance matrix which is invertible for daily and monthly returns. I used the Ledoit,Wolf shrinkage estimator for the covariance matrix and now I get really small portfolio variances, implying unrealistic Sharpe-ratios. I assume this has to do with the fact that I didn't shrink the return vector. Which shrinkage estimator would you use on the return vector? Do you know any R-Script for this?
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$\begingroup$ I'm voting to close this question as off-topic because asking for code does not constitute a proper question $\endgroup$– Dirk EddelbuettelAug 29, 2015 at 18:53
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$\begingroup$ Come down! I wasn't asking for a code. I'm primarily asking if anyone has had similar problems of having a covariance matrix constituting of too small values after using the Ledoit-Wolf shrinkage estimator and knows what could be the problem or how one could solve this. $\endgroup$– User1111Aug 30, 2015 at 20:05
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$\begingroup$ It is not clear that this is the use of the Ledoit-Wolf shrinkage. (Indeed, it is not clear L-W shrinkage has any use.) $\endgroup$– shabbychefJan 21, 2018 at 5:36
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