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Joint Estimation of Conditional Mean and Covariance for Unbalanced Panels

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  • Damir Filipović

    (École Polytechnique Fédérale de Lausanne; Swiss Finance Institute)

  • Paul Schneider

    (University of Lugano - Institute of Finance; Swiss Finance Institute)

Abstract

We propose a novel nonparametric kernel-based estimator of cross-sectional conditional mean and covariance matrices for large unbalanced panels. We show its consistency and provide finite-sample guarantees. In an empirical application, we estimate conditional mean and covariance matrices for a large unbalanced panel of monthly stock excess returns given macroeconomic and firm-specific covariates from 1962 to 2021. The estimator performs well with respect to statistical measures. It is informative for empirical asset pricing, generating conditional mean-variance efficient portfolios with substantial outof-sample Sharpe ratios far beyond equal-weighted benchmarks.

Suggested Citation

  • Damir Filipović & Paul Schneider, 2024. "Joint Estimation of Conditional Mean and Covariance for Unbalanced Panels," Swiss Finance Institute Research Paper Series 24-60, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2460
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