Veröffentlichungen | Abstract

 

How to Incorporate Estimation Risk into Markowitz Optimization

in: Chamoni, P. (Hrsg.): Operations Research Proceedings 2001, Berlin

2002, S. 175-182

 

Prof. Dr. Alexander Kempf [University of Cologne]

Dr. Klaus Kreuzberg [University of Cologne]

Dr. Christoph Memmel [University of Cologne]

 

Abstract:

This paper presents a new approach to incorporate estimation risk into mean-variance

portfolio selection. The key contribution of our analysis is that we model

the estimation risk as a second, independent source of risk. We show that

widely used portfolio strategies (naive diversification, global minimum variance

investment and classical two-step portfolio optimization) are nested in our

model. In the second part of the paper we empirically test these strategies

using G7-countries MSCI index return data. Our model leads to substantially

superior performance as compared to several benchmark strategies. We find

evidence that the estimation risk depends on the inhomogenity of a market.