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The effect of estimation in high-dimensional portfolios

Gandy, Axel and Veraart, Luitgard A. M. (2013) The effect of estimation in high-dimensional portfolios. Mathematical Finance, 23 (3). pp. 531-559. ISSN 0960-1627

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Abstract

We study the effect of estimated model parameters in investment strategies on expected log-utility of terminal wealth. The market consists of a riskless bond and a potentially vast number of risky stocks modeled as geometric Brownian motions. The well-known optimal Merton strategy depends on unknown parameters and thus cannot be used in practice. We consider the expected utility of several estimated strategies when the number of risky assets gets large. We suggest strategies which are less affected by estimation errors and demonstrate their performance in a real data example. Strategies in which the investment proportions satisfy an inline image-constraint are less affected by estimation effects.

Item Type: Article
Official URL: http://www.wiley.com/bw/journal.asp?ref=0960-1627
Additional Information: © 2012 Wiley Periodicals
Library of Congress subject classification: H Social Sciences > HG Finance
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
Sets: Departments > Mathematics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 27 Jul 2011 13:36
URL: http://eprints.lse.ac.uk/37618/

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