# Questions tagged [covariance-estimation]

The tag has no usage guidance.

39 questions
Filter by
Sorted by
Tagged with
37 views

### Reliability of R Package on Covariance Matrix Shrinkage

I recently used a R package CovTools in R with the command CovEst.2003LW(X), where X is your sample covariance matrix as an input, to compute the shrunk covariance matrix (an estimate that is closest ...
110 views

### Calculating Portfolios Covariance via Bilinearity with Log or Simple Returns

I'm wanting to calculate the covariance between two portfolios $A$ and $B$ which are allocated to assets $X_i$ (where $i \in \left[1, 2, \cdots, N \right]$) with weights $\vec{w_A}$ and $\vec{w_B}$, ...
106 views

### Estimating covariance with intraday data

I have intraday (30 min) data for a number of stocks, and I would like to calculate the covariance matrix of returns. For the purpose of calculating the covariance matrix, is it better/more correct to ...
53 views

### Bias-Variance tradeoff for Covariance Estimation w/ Different Frequencies

In general, what does the bias-variance tradeoff look like when estimating covariance matrices with varying return frequencies (i.e. daily, weekly, monthly returns)? From my observations I've noticed ...
39 views

### What does a non-stochastic limiting shrinkage function mean?

I'm reading the paper "The Power of (Non-)Linear Shrinking: A Review and Guide to Covariance Matrix Estimation" by Ledoit and Wolf (2020). When a function that is used to transform the ...
111 views

### Sample Variance of Portfolio

Let $w$ denote a vector of portfolio weights, $r_i$ denote the $i$th return vector, $\Sigma$ denote the Covariance matrix of $r_i$ and let $\hat{\Sigma}$ denote the sample covariance matrix of $r_i$. ...
1 vote
447 views

498 views

### Number of Observations for Non-Singular Covariance Matrix Estimation

Marcos López de Prado writes the following in his book Advances in Financial Machine Learning: In general, we need at least \frac{1}{2} N (N+1) independent and ...
115 views

### Implementing Hierarchical PCA for financial time series in R

I would like to implement the method "Hierarchical PCA", as described in the following paper and compare it to a "standard" PCA. I like to do this in R AVELLANEDA, Marco. ...
97 views

### Odd Result from Computing Correlation Matrix from Kalman Filter Posteriori Covariance Estimate

I am using a Kalman Filter to estimate the return dynamics of a forwards curve on a particular commodity. My state space is the initial forwards values, and an initial guess of the drift functions for ...
1 vote
52 views

### Can the covariance matrix be represented as a scalar or something similarly small, instead of a large pair-wise grid?

The covariance matrix tabulates pair-wise interactions between variables (assets) one-at-a-time into a grid, which can quickly become large as the number of assets included in a portfolio, for example,...
141 views

2k views

### Creating a Covariance Matrix

Lets say that you have the correlation of x,y and you have the standard deviations of x and y , how would you then find the covariance of x,y using the correlation of x,y and and the standard ...
478 views

### Is a more robust Covariance estimation possible?

I'm working on a mean-variance optimization problem, but instead of financial securities I'm choosing a 'portfolio' of N athletes. It is a 1-period optimization problem over one generic statistic ...
1 vote
45 views

### Correlation coefficient without cash flows?

I'm an intern at a company and one of our tasks is to calculate the the probability of default of both participants of a Swap(a Client and a Bank), for which we first need the correlation coefficient ...
1 vote
79 views

### Misunderstanding of time series autocovariance

I'm reading the "Time Series: Theory and Methods (2nd ed.)" by P.J.Brockwell and R.A.Davis. I've stopped at the one moment at pp.218-219 (Chapter 7 "Estimation of the mean and the Autocovariance ...
1 vote
271 views

### Estimating an GARCH(1,1) model? Long hand method

I am really trying to invest some time to estimate a GARCH(1,1) method, I know there is many statistical packages that will do this for me (Eviews, MATLAB, R), but I am trying to do this by hand, so ...
215 views

### Is Ledoit-Wolf Shrinkage with a Constant Correlation Prior Reasonable for a Stock/Bond Mix?

I've been looking into Ledoit-Wolf shrinkage but I've found the papers concentrate on large numbers of assets that tend to all be highly correlated. Often a universe of large cap stocks. I'm ...
1 vote
176 views

### Black Litterman - numerical instability

I am trying to work out the formula for the posterior mean in Black Litterman's model assuming 100% confidence : Ref: https://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/...
644 views

### Portfolio Optimisation/Covariance Estimation on a large scale

When using Markowitz Portfolio Theory, e.g. for finding an optimal portfolio composition, one needs to have estimates of the returns, but most importantly of the covariance matrix. If our universe of ...
969 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 ...
112 views

### What is special about covariance estimation from statistical factor models?

If you were to compare the usual sample covariance estimate to a robust covariance estimate (such as MCD), you can say that the robust estimate is more tolerant to outliers in the data and will not be ...
1 vote
181 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 ...