Honey, I Shrunk the Sample Covariance Matrix

Olivier Ledoit, Michael Wolf · 2004 · The Journal of Portfolio Management

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Shrink the noisy sample covariance toward a structured target. A free improvement for any optimiser.

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At a glance

Level: Intermediate: Comfortable with statistics, regressions and basic probability models
Horizon: LFT
Data needed: Daily bars Set what data you have
Themes: Risk & portfolio
Assets: Equities
Market: Global

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@article{ledoit2004honey,
  author = {Ledoit, Olivier and Wolf, Michael},
  title = {{Honey, I Shrunk the Sample Covariance Matrix}},
  journal = {The Journal of Portfolio Management},
  year = {2004},
  doi = {10.3905/jpm.2004.110}
}

Ledoit, O., & Wolf, M. (2004). Honey, I Shrunk the Sample Covariance Matrix. The Journal of Portfolio Management. https://doi.org/10.3905/jpm.2004.110