Questions tagged [covariance-estimation]
The covariance-estimation tag has no usage guidance.
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Excess Return Covariance Matrix is Singular - Cash return and risk free rate are the same [closed]
I've created a three asset excess return covariance matrix. The assets are; equity, bonds, and cash. However, my cash return is the same as my risk free rate ( i.e. 3 month Euribor). This is leaving ...
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Covariance matrix of Gaussian EM output
I have a project where i wanted to use Expectation Maximization to fill in missing logreturns.
With regards to that I have a question I haven't been able to solve.
Logically EM should decreese ...
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Distribution of sample covariance times inverse covariance times sample covariance
I want to understand the distribution of the random variable:
$$S_n = \frac{1}{n^2} 1'\hat \Sigma \Sigma ^{-1} \hat \Sigma 1$$.
1 is a vector of ones of size n, and the variance is of size nxn. $\hat \...
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Return forecasting for portfolio optimization
I have some questions related to forecasting returns and how it's used to generate the inputs for portfolio optimization.
First, I want to understand why factor models such as FF- 3-factor model are ...
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Reliability of R Package on Covariance Matrix Shrinkage
I recently used a R package CovTools in R with the command CovEst.2003LW(X), where X is your sample covariance matrix as an input, to compute the shrunk covariance matrix (an estimate that is closest ...
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Calculating Portfolios Covariance via Bilinearity with Log or Simple Returns
I'm wanting to calculate the covariance between two portfolios $A$ and $B$ which are allocated to assets $X_i$ (where $i \in \left[1, 2, \cdots, N \right]$) with weights $\vec{w_A}$ and $\vec{w_B}$, ...
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Estimating covariance with intraday data
I have intraday (30 min) data for a number of stocks, and I would like to calculate the covariance matrix of returns.
For the purpose of calculating the covariance matrix, is it better/more correct to ...
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Bias-Variance tradeoff for Covariance Estimation w/ Different Frequencies
In general, what does the bias-variance tradeoff look like when estimating covariance matrices with varying return frequencies (i.e. daily, weekly, monthly returns)?
From my observations I've noticed ...
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What does a non-stochastic limiting shrinkage function mean?
I'm reading the paper "The Power of (Non-)Linear Shrinking: A Review and Guide to Covariance Matrix Estimation" by Ledoit and Wolf (2020). When a function that is used to transform the ...
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Sample Variance of Portfolio
Let $w$ denote a vector of portfolio weights, $r_i$ denote the $i$th return vector, $\Sigma$ denote the Covariance matrix of $r_i$ and let $\hat{\Sigma}$ denote the sample covariance matrix of $r_i$.
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Shrinkage of the Sample Covariance matrix, theory
is there any theory behind the covariance matrix shrinkage paper, why it works?
I am talking about this stats exchange thread
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Number of Observations for Non-Singular Covariance Matrix Estimation
Marcos López de Prado writes the following in his book Advances in Financial Machine Learning:
In general, we need at least \frac{1}{2} N (N+1) independent and ...
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Implementing Hierarchical PCA for financial time series in R
I would like to implement the method "Hierarchical PCA", as described in the following paper and compare it to a "standard" PCA. I like to do this in R
AVELLANEDA, Marco. ...
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Odd Result from Computing Correlation Matrix from Kalman Filter Posteriori Covariance Estimate
I am using a Kalman Filter to estimate the return dynamics of a forwards curve on a particular commodity. My state space is the initial forwards values, and an initial guess of the drift functions for ...
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Can the covariance matrix be represented as a scalar or something similarly small, instead of a large pair-wise grid?
The covariance matrix tabulates pair-wise interactions between variables (assets) one-at-a-time into a grid, which can quickly become large as the number of assets included in a portfolio, for example,...
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