Spectrally-Corrected and Regularized Global Minimum Variance Portfolio for Spiked Model

Abstract

Considering the shortcomings of the traditional sample covariance matrix estimation, this paper proposes an improved global minimum variance portfolio model and named spectral corrected and regularized global minimum variance portfolio (SCRGMVP), which is better than the traditional risk model. The key of this method is that under the assumption that the population covariance matrix follows the spiked model and the method combines the design idea of the sample spectrally-corrected covariance matrix and regularized. The simulation of real and synthetic data shows that our method is not only better than the performance of traditional sample covariance matrix estimation (SCME), shrinkage estimation (SHRE), weighted shrinkage estimation (WSHRE) and simple spectral correction estimation (SCE), but also has lower computational complexity.