Journal article
Risks of large portfolios
Journal of econometrics, Vol.186(2), pp.367-387
06/01/2015
DOI: 10.1016/j.jeconom.2015.02.015
PMCID: PMC4504849
PMID: 26195851
Abstract
The risk of a large portfolio is often estimated by substituting a good estimator of the volatility matrix. However, the accuracy of such a risk estimator is largely unknown. We study factor-based risk estimators under a large amount of assets, and introduce a high-confidence level upper bound (H-CLUB) to assess the estimation. The H-CLUB is constructed using the confidence interval of risk estimators with either known or unknown factors. We derive the limiting distribution of the estimated risks in high dimensionality. We find that when the dimension is large, the factor-based risk estimators have the same asymptotic variance no matter whether the factors are known or not, which is slightly smaller than that of the sample covariance-based estimator. Numerically, H-CLUB outperforms the traditional crude bounds, and provides an insightful risk assessment. In addition, our simulated results quantify the relative error in the risk estimation, which is usually negligible using 3-month daily data.
Details
- Title: Subtitle
- Risks of large portfolios
- Creators
- Jianqing Fan - Princeton UniversityYuan Liao - University of Maryland, College ParkXiaofeng Shi - Princeton University
- Resource Type
- Journal article
- Publication Details
- Journal of econometrics, Vol.186(2), pp.367-387
- DOI
- 10.1016/j.jeconom.2015.02.015
- PMID
- 26195851
- PMCID
- PMC4504849
- NLM abbreviation
- J Econom
- ISSN
- 0304-4076
- eISSN
- 1872-6895
- Publisher
- Elsevier B.V
- Number of pages
- 21
- Language
- English
- Date published
- 06/01/2015
- Academic Unit
- Economics
- Record Identifier
- 9984936838402771
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