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Multivariate Shrinkage for Optimal Portfolio Weights

Author

Listed:
  • Vasyl Golosnoy
  • Yarema Okhrin

Abstract

This paper proposes a multivariate shrinkage estimator for the optimal portfolio weights. The estimated classical Markowitz weights are shrunk to the deterministic target portfolio weights. Assuming log asset returns to be i.i.d. Gaussian, explicit solutions are derived for the optimal shrinkage factors. The properties of the estimated shrinkage weights are investigated both analytically and using Monte Carlo simulations. The empirical study compares the competing portfolio selection approaches. Both simulation and empirical studies show that the proposed shrinkage estimator is robust and provides significant gains to the investor compared to benchmark procedures.

Suggested Citation

  • Vasyl Golosnoy & Yarema Okhrin, 2007. "Multivariate Shrinkage for Optimal Portfolio Weights," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 441-458.
    • Handle: RePEc:taf:eurjfi:v:13:y:2007:i:5:p:441-458
    DOI: 10.1080/13518470601137592
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    References listed on IDEAS

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