TY - JOUR
T1 - Sampling distributions of optimal portfolio weights and characteristics in small and large dimensions
AU - Bodnar, Taras
AU - Dette, Holger
AU - Parolya, Nestor
AU - Thorsén, Erik
PY - 2021
Y1 - 2021
N2 - Optimal portfolio selection problems are determined by the (unknown) parameters of the data generating process. If an investor wants to realize the position suggested by the optimal portfolios, he/she needs to estimate the unknown parameters and to account for the parameter uncertainty in the decision process. Most often, the parameters of interest are the population mean vector and the population covariance matrix of the asset return distribution. In this paper, we characterize the exact sampling distribution of the estimated optimal portfolio weights and their characteristics. This is done by deriving their sampling distribution by its stochastic representation. This approach possesses several advantages, e.g. (i) it determines the sampling distribution of the estimated optimal portfolio weights by expressions, which could be used to draw samples from this distribution efficiently; (ii) the application of the derived stochastic representation provides an easy way to obtain the asymptotic approximation of the sampling distribution. The later property is used to show that the high-dimensional asymptotic distribution of optimal portfolio weights is a multivariate normal and to determine its parameters. Moreover, a consistent estimator of optimal portfolio weights and their characteristics is derived under the high-dimensional settings. Via an extensive simulation study, we investigate the finite-sample performance of the derived asymptotic approximation and study its robustness to the violation of the model assumptions used in the derivation of the theoretical results.
AB - Optimal portfolio selection problems are determined by the (unknown) parameters of the data generating process. If an investor wants to realize the position suggested by the optimal portfolios, he/she needs to estimate the unknown parameters and to account for the parameter uncertainty in the decision process. Most often, the parameters of interest are the population mean vector and the population covariance matrix of the asset return distribution. In this paper, we characterize the exact sampling distribution of the estimated optimal portfolio weights and their characteristics. This is done by deriving their sampling distribution by its stochastic representation. This approach possesses several advantages, e.g. (i) it determines the sampling distribution of the estimated optimal portfolio weights by expressions, which could be used to draw samples from this distribution efficiently; (ii) the application of the derived stochastic representation provides an easy way to obtain the asymptotic approximation of the sampling distribution. The later property is used to show that the high-dimensional asymptotic distribution of optimal portfolio weights is a multivariate normal and to determine its parameters. Moreover, a consistent estimator of optimal portfolio weights and their characteristics is derived under the high-dimensional settings. Via an extensive simulation study, we investigate the finite-sample performance of the derived asymptotic approximation and study its robustness to the violation of the model assumptions used in the derivation of the theoretical results.
KW - high-dimensional asymptotics
KW - optimal portfolio
KW - parameter uncertainty
KW - Sampling distribution
KW - stochastic representation
UR - http://www.scopus.com/inward/record.url?scp=85108111276&partnerID=8YFLogxK
U2 - 10.1142/S2010326322500083
DO - 10.1142/S2010326322500083
M3 - Article
AN - SCOPUS:85108111276
SN - 2010-3263
VL - 11
JO - Random Matrices: Theory and Application
JF - Random Matrices: Theory and Application
IS - 01
M1 - 2250008
ER -