Adaptive Beta Shrinkage estimation of covariance matrices

SAFA Special Issue

Adaptive Beta Shrinkage estimation of covariance matrices

Published in: Investment Analysts Journal
Volume 54 , issue 3 , 2025 , pages: 387–407
DOI: 10.1080/10293523.2025.2553255
Author(s): Henri Staal Department of Statistics and Actuarial Science, Stellenbosch University, South Africa , Emlyn Flint Peresec, South Africa

Abstract

Accurate estimation of the covariance matrix is essential for mean-variance portfolio optimisation, yet the sample covariance matrix is a notoriously noisy estimate, especially in high dimensions. Contemporary shrinkage methods attempt to mitigate this noise but often retain significant estimation error in higher-dimensional settings or become computationally impractical in these scenarios.

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