High Dimensional Minimum Variance Portfolio Estimation under Statistical Factor Models

Abstract

We propose a high dimensional minimum variance portfolio estimator under statistical factor models, and show that our estimated portfolio enjoys sharp risk consistency. Our approach relies on properly integrating l1 constraint on portfolio weights with an appropriate covariance matrix estimator. In terms of covariance matrix estimation, we extend the theoretical results of POET(Fan et al. (2013)) to a setting that is coherent with principal component analysis. Simulation and extensive empirical studies on S&P 100 Index constituent stocks demonstrate favorable performance of our MVP estimator compared with benchmark portfolios.

Keywords: Minimum variance portfolio, High dimension, Principal component analysis, Factor model

JEL Classification: C13, C55, C58, G11