Random Matrix Filtering in Portfolio Optimization

Details Random Matrix Filtering in Portfolio Optimization Random Matrix Filtering in Portfolio Optimization

2005-09-28

arxiv.org/abs/physics/0509235v1

Acta Physica Polonica 36 (2005) 2757

Physics

Physics and Society

9 pages with 3 EPS figures

Scientific paper

We study empirical covariance matrices in finance. Due to the limited amount of available input information, these objects incorporate a huge amount of noise, so their naive use in optimization procedures, such as portfolio selection, may be misleading. In this paper we investigate a recently introduced filtering procedure, and demonstrate the applicability of this method in a controlled, simulation environment.

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