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The Dispersion Bias

Author

Listed:
  • Goldberg, Lisa R
  • Papanicolaou, Alex
  • Shkolnik, Alex
Abstract
We identify and correct excess dispersion in the leading eigenvector of a sample covariance matrix when the number of variables vastly exceeds the number of observations. Our correction is datadriven, and it materially diminishes the substantial impact of estimation error on weights and risk forecasts of minimum variance portfolios. We quantify that impact with a novel metric, the optimization bias, which has a positive lower bound prior to correction and tends to zero almost surely after correction. Our analysis sheds light on aspects of how estimation error corrupts an estimated covariance matrix and is transmitted to portfolios via quadratic optimization.

Suggested Citation

  • Goldberg, Lisa R & Papanicolaou, Alex & Shkolnik, Alex, 2022. "The Dispersion Bias," Department of Economics, Working Paper Series qt4kt5g2x3, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt4kt5g2x3
    as

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    References listed on IDEAS

    as
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