Questions tagged [covariance-matrix]
The covariance-matrix tag has no usage guidance.
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Explanation or implementation of Ledoit-Wolf estimator (without math packages)
I have calculated weights of selected assets in a market-neutral portfolio (presumably with min variance) using PCA and simple data covariance matrix.
The question is :
It is obvious that Cov Matrix ...
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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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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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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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Annualize a covariance matrix?
I am attempting to find the annualized covariance between assets in a portfolio but I only have daily data. So how do I annualize the covariance matrix between these assets?
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Variance of a portfolio based on log-returns
Modern Portfolio Theory Optimization Problem is based on expected linear returns and covariances of linear returns.
That's said, variance and expected return of a portfolio based on linear returns r ...
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Residual Covariance Matrix, and MVO for Residual Variance and Alpha
My overall goal is to find an efficient frontier using QP in terms of $\alpha$ and residual variance ($\omega^2$) for a portfolio $P$ given a benchmark $B$.
We know the equation for residual variance ...
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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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Reduced rank / matrix factorisation techniques and their uses in portfolio optimisation?
I am interested in reduced rank / matrix factorisation techniques and their uses across finance and portfolio optimisation. For example, PCA might be used to reduce the number of components you are ...
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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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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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PCA on covariance matrix with weights on the columns?
I'm reading two papers by Mark Kritzman on two indicators (turbulence proxied by the Mahalanobis distance and absorption ratio which is basically the ratio of the variance captured by the top 20% PCA ...
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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,...
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Barra covariance matrix construction
I am trying to replicate the covariance matrix used by Barra risk models.
All Barra models have half life parameters for volatilities and correlations (e.g. if the half life for volatlity is 90 days, ...
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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/...
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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 ...
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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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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 ...
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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 ...
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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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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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What is the difference between np.cov(array) and array.cov()?
I'm trying to find a covariance matrix, so when i use returns.cov() on my returns variable, I get a good result. Unfortunately, when i want to use ...
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Covariance/correlation matrix from data with missing data points
I have a data set with index fund quotes, and I'm trying to compute the efficient portfolio frontier for it.
But some data points are missing. In some cases there are few funds that trading even on ...
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Covariance of Individual Return and Portfolio Return
Hi guys,
Is it possible to get the covariance between the individual return and portfolio return given the correlation matrix, volatility matrix, weights matrix and return matrix?
I know how to get ...
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How to compute the portfolio risk when weights are negative?
In QMiF (p. 239) , the variance of a portfolio is defined as:
V(R) = w'Vw = w'DCDw = x'Cx
Does this formula hold if the weights are negative (i.e., short)?
For example, if I have a 5x5 covariance ...
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