# Questions tagged [covariance-matrix]

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### How can we simulate daily return based on multi-factor model?

This is an interesting question for simulation. The question is a bit lengthy but I'm trying my best to make it super clear here. Now I have some multi-factor model, say some US barra risk model from ...
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 ...
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1 vote
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### Robust estimates of variance covariance matrix

I am looking for help from other people with experience creating variance covariance matrix that have enough predictive power to actually lower portfolio volatility out of sample. Using real world ...
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### Evaluating estimate of covariance matrix

I am testing out different methods / shrinkages to estimate a covariance matrix and I am wondering what is the best method of comparing the estimated covariance matrix to the true covariance matrix (...
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### 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 $\vec{w_B}$, ...
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### negative portfolio variance? Creating a positive semi definite matrix in excel

I am attempting a portfolio optimization model and ended up generating negative portfolio variance using 2WaWbσaσbcorrel(a,b) or 2WaWb*Cov(a,b) From reading the linked article where other users had an ...
1 vote
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### How to implement computation of a certain covariance matrix?

The screenshot below from the paper "Short-Term Variations and Long-Term Dynamics in Commodity Prices" by Schwartz and Smith (2000) shows the formula for the covariance matrix $V_n$ based on ...
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### How can one quantify the incremental value of better covariance matrix modeling in portfolio optimization?

Let's say we have two estimators of the covariance matrix, $\hat{C}_1$ and $\hat{C}_2$, and the latter is an improvement on the former. Is there any measure of the improvement that can be sensibly ...
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### 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 ...
132 views

### Clustered vs. GMM-based standard errors: which ones to use in asset pricing?

Consider estimating an asset pricing model such as the CAPM or a multifactor model using monthly data. Petersen (2009) section "Asset pricing application" suggests use of standard errors ...
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### Imposing diagonality of error covariance matrix when the CAPM holds

Assuming that the CAPM holds, the total risk of an asset can be partitioned into systematic risk (associated with the market factor) and idiosyncratic risk. Idiosyncratic risk is asset specific. Does ...
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384 views

### Calculating variance of long/short portfolio

Say I have a portfolio of stocks, stock A, stock B and stock C, with the below positions: stock A: long 100 USD stock B: long 50 USD stock C: short 200 USD How do I calculate the portfolio variance ...
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### finding the monthly covariance matrix given daily covariance matrix

consider the following problem i am trying to find the monthly covariance matrix given daily data. i have the following codeimport datetime ...
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### 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 ...
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### How do I annualise a covariance matrix?

It is very difficult to source a rigorous answer to the above question. I know the answer is: Ann. Covariance = covariance * frequency Can anyone explain the ...
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### How to incorporate "correlation neglect" in a M-V-Framework?

at the risk of boring you with another behavioral finance question, i found a bunch of papers on a phenomenon dubbed correlation neglect, where economic agents misperceive the correlation structure of ...
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### Calculate Exponentially-Weighted Covariance Matrix over Finite Window

I have an (n,m) array (specifically containing asset returns over n days for m assets). I'm ...
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### N asset covariance matrix vs N-1 asset covariance matrix

so I have been using a M-V framework to form M-V efficient portfolios. I have noticed that every time I make my investment universe smaller the minimum variance frontier moves to the right. This ...
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### Variance covariance matrix for a portfolio of credit derivatives

If the var-covar matrix for equities takes the return on equity prices, what should the var-covar matrix for credit derivatives (like a CDS) take? Should it be the probability of default, since that ...
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 $r_i$. ...
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### Why does Hierarchical Risk Parity ignore the clusters generated?

I am currently working through the Hierarchical Risk Parity algorithm (Lopez de Prado (2016) link ) and trying to understand each of the steps. I have completed the step of creating the clusters, and ...
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