Skip to main content
eScholarship
Open Access Publications from the University of California

UC Berkeley

UC Berkeley Previously Published Works bannerUC Berkeley

The Dispersion Bias

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.

Many UC-authored scholarly publications are freely available on this site because of the UC's open access policies. Let us know how this access is important for you.

Main Content
For improved accessibility of PDF content, download the file to your device.
Current View