Markowitz portfolio selection is a cornerstone in finance, both in academia and in the industry. Most academic studies either ignore transaction costs or account for them in a way that is both unrealistic and suboptimal by (i) assuming transaction costs to be constant across stocks and (ii)...

This paper estimates the curvature of the Earth, defined as one over its radius, without using any physics. The orthodox model is that the Earth is nearly spherical with a curvature of Û/20, 000 km. By contrast, the heterodox flat-Earth model stipulates a curvature of zero. Abstracting from the...

Applied researchers often test for the difference of the variance of two investment strategies;in particular, when the investment strategies under consideration aim to implementthe global minimum variance portfolio. A popular tool to this end is the F-test for theequality of variances....

Many statistical applications require an estimate of a covariance matrix and/or its inverse.When the matrix dimension is large compared to the sample size, which happensfrequently, the sample covariance matrix is known to perform poorly and may suffer fromill-conditioning. There already exists...

Covariance matrix estimation and principal component analysis (PCA) are two cornerstones of multivariate analysis. Classic textbook solutions perform poorly when the dimension of the data is of a magnitude similar to the sample size, or even larger. In such settings, there is a common remedy for...

This paper revisits the methodology of Stein (1975, 1986) for estimating a covariance matrix in the setting where the number of variables can be of the same magnitude as the sample size. Stein proposed to keep the eigenvectors of the sample covariance matrix but to shrink the eigenvalues. By...

There has been a recent debate in the marketing literature concerning the possible mispricing of customer satisfaction. While earlier studies claim that portfolios with attractive out-of-sample properties can be formed by loading on stocks whose firms enjoy high customer satisfaction, later...

This paper introduces a new method for deriving covariance matrix estimators that are decision-theoretically optimal. The key is to employ large-dimensional asymptotics: the matrix dimension and the sample size go to infinity together, with their ratio converging to a finite, nonzero limit. As...

The mispricing of marketing performance indicators (such as brand equity, churn, and customer satisfaction) is an important element of arguments in favor of the financial value of marketing investments. Evidence for mispricing can be assessed by examining whether or not portfolios composed of...

Markowitz (1952) portfolio selection requires estimates of (i) the vector of expected returns and (ii) the covariance matrix of returns. Many proposals to address the first question exist already. This paper addresses the second question. We promote a new nonlinear shrinkage estimator of the...