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Random Matrix Filtering in Portfolio Optimization

Gabor Papp·Szilard Pafka·Maciej A. Nowak·Imre Kondor
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Abstract

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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Gabor Papp, Szilard Pafka, Maciej A. Nowak, Imre Kondor. 2005-09-28. Random Matrix Filtering in Portfolio Optimization. https://arxiv.org/abs/physics/0509235

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