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How Much Should Portfolios Shrink?

Han, C.

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Authors

C. Han



Abstract

This paper develops a portfolio model that penalizes the deviation from a reference portfolio. The proposed model renders a robust portfolio that performs superior under parameter uncertainty. Penalizing the deviation also improves the performance of existing shrinkage portfolio models that are sub‐optimal due to model parameter uncertainty. The equal‐weight portfolio turns out to be a better reference portfolio than the currently holding portfolio even in the presence of transaction costs. A data‐driven method for determining the degree of penalization is offered. Comprehensive simulation and empirical studies suggest that the proposed model significantly outperforms various existing models.

Citation

Han, C. (2020). How Much Should Portfolios Shrink?. Financial Management, 49(3), 707-740. https://doi.org/10.1111/fima.12282

Journal Article Type Article
Acceptance Date Jun 18, 2019
Online Publication Date Aug 1, 2019
Publication Date Sep 3, 2020
Deposit Date Jun 26, 2019
Publicly Available Date Aug 1, 2020
Journal Financial Management
Print ISSN 0046-3892
Electronic ISSN 1755-053X
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 49
Issue 3
Pages 707-740
DOI https://doi.org/10.1111/fima.12282
Public URL https://durham-repository.worktribe.com/output/1327911

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Accepted Journal Article (520 Kb)
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Copyright Statement
This is the accepted version of the following article: Han,C. (2020). How Much Should Portfolios Shrink? Financial Management 49(3): 707-740 which has been published in final form at [https://doi.org/10.1111/fima.12282. This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.





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