Covariance Estimation in Dynamic Portfolio Optimization: A Realized Single Factor Model*

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dc.citation.journalTitleAFA 2010 Atlanta Meetings Paper
dc.contributor.authorKyj, Lada
dc.contributor.authorOstdiek, Barbara
dc.contributor.authorEnsor, Katherine
dc.date.accessioned2020-09-11T01:24:29Z
dc.date.available2020-09-11T01:24:29Z
dc.date.issued2009
dc.description.abstractRealized covariance estimation for large dimension problems is little explored and poses challenges in terms of computational burden and estimation error. In a global minimum volatility setting, we investigate the performance of covariance conditioning techniques applied to the realized covariance matrices of the 30 DJIA stocks. We find that not only is matrix conditioning necessary to deliver the benefits of high frequency data, but a single factor model, with a smoothed covariance estimate, outperforms the fully estimated realized covariance in one-step ahead forecasts. Furthermore, a mixed-frequency single-factor model - with factor coefficients estimated using low-frequency data and variances estimated using high-frequency data performs better than the realized single-factor estimator. The mixed-frequency model is not only parsimonious but it also avoids estimation of high-frequency covariances, an attractive feature for less frequently traded assets. Volatility dimension curves reveal that it is difficult to distinguish among estimators at low portfolio dimensions, but for well-conditioned estimators the performance gain relative to the benchmark 1/N portfolio increases with N.
dc.format.extent38 pp
dc.identifier.citationKyj, Lada, Ostdiek, Barbara and Ensor, Katherine. "Covariance Estimation in Dynamic Portfolio Optimization: A Realized Single Factor Model*." <i>AFA 2010 Atlanta Meetings Paper,</i> (2009) SSRN: http://dx.doi.org/10.2139/ssrn.1364642.
dc.identifier.doihttp://dx.doi.org/10.2139/ssrn.1364642
dc.identifier.urihttps://hdl.handle.net/1911/109328
dc.language.isoeng
dc.publisherSSRN
dc.titleCovariance Estimation in Dynamic Portfolio Optimization: A Realized Single Factor Model*
dc.typeConference paper
dc.type.dcmiText
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