Sample Eigenvalues Adjustment for Portfolio Performance Improvement under Factor Models

32 Pages Posted: 28 Apr 2017 Last revised: 31 Oct 2018

See all articles by Danqiao Guo

Danqiao Guo

University of Waterloo

Chengguo Weng

University of Waterloo

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: October 2018

Abstract

We identify a few sample eigenvalues adjustment patterns that lead to an improvement in the out-of-sample portfolio Sharpe ratio when the population covariance matrix admits a high-dimensional factor model. These patterns unveil the key to portfolio performance improvement and shed light on the effectiveness of a few well-known covariance matrix estimation methods which were not designed to improve the out-of-sample portfolio performance.

Keywords: Global Minimum Variance Portfolio, Tail Eigenvalues Amplification, Risk Reduction, High-Dimensionality

Suggested Citation

Guo, Danqiao and Weng, Chengguo and Wirjanto, Tony S., Sample Eigenvalues Adjustment for Portfolio Performance Improvement under Factor Models (October 2018). Available at SSRN: https://ssrn.com/abstract=2959808 or http://dx.doi.org/10.2139/ssrn.2959808

Danqiao Guo (Contact Author)

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Chengguo Weng

University of Waterloo ( email )

M3-200 Univ Ave W
Waterloo, Ontario N2L3G1
Canada
(1)888-4567 ext.31132 (Phone)

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

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