Shrinkage and thresholding approaches for expected utility portfolios: An analysis in terms of predictive ability

Dutta, S and Jain, S (2024) Shrinkage and thresholding approaches for expected utility portfolios: An analysis in terms of predictive ability. In: Finance Research Letters, 64 .

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Abstract

In this paper, we estimate Expected Utility Portfolios (EUPs) in high-dimensional, low-sample settings using various covariance matrix estimation methods, including shrinkage and thresholding-based methods. We perform synthetic experiments comparing these methods, using Average Out-of-Sample Variance (AOV) for Global Minimum Variance (GMV) portfolios and Average Out-of-Sample Utility (AOU) for EUPs. Additionally, we propose a practical method for fund managers to select optimal models based on empirical data, relying on AOV and AOU performance measures. The results indicate that shrinkage-based methods outperform thresholding-based ones in high-dimensional settings, with non-linear shrinkage being particularly effective. © 2024 Elsevier Inc.

Item Type:	Journal Article
Publication:	Finance Research Letters
Publisher:	Elsevier Ltd
Additional Information:	The copyright for this article belongs to Elsevier Ltd.
Department/Centre:	Division of Interdisciplinary Sciences > Management Studies
Date Deposited:	20 May 2024 11:45
Last Modified:	20 May 2024 11:45
URI:	https://eprints.iisc.ac.in/id/eprint/84748

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