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An enhanced Gerber statistic for portfolio optimization

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  • Smyth, William
  • Broby, Daniel

Abstract

The purpose of this letter is to introduce a modified version of the Gerber statistic resulting in the enhancement of its function as a measure of statistical co-movement. The modification centres around the redefinition of zones and thresholds, alongside the use of finite real-valued contributions rather than discrete binary counts in assigning value to individual co-movements. Arguments for the former are based on the statistical alignment of data series for the purposes of more effectively delineating concordant and discordant co-movement. Arguments for the latter are based on attributing greater weight to better information. Collectively this approach simultaneously incorporates the merits of Gerber-like thresholds and zoning, and conventional correlation-like co-movement measurement.

Suggested Citation

  • Smyth, William & Broby, Daniel, 2022. "An enhanced Gerber statistic for portfolio optimization," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322004317
    DOI: 10.1016/j.frl.2022.103229
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    References listed on IDEAS

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    1. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-278, July.
    2. Enoch Cheng & Clemens C. Struck, 2021. "Antinoise in U.S. equity markets," Quantitative Finance, Taylor & Francis Journals, vol. 21(12), pages 2069-2087, December.
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    Cited by:

    1. Flint, Emlyn & Polakow, Daniel, 2023. "Deconstructing the Gerber statistic," Finance Research Letters, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Estimation error; Gerber statistic; Portfolio optimization; Shrinkage; Equity co-movements; Modern portfolio theory;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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