Consistent estimation of the high-dimensional efficient frontier

In this paper, we analyze the asymptotic behavior of the main characteristics of the mean-variance efficient frontier employing random matrix theory. Our particular interest covers the case when the dimension p and the sample size n tend to infinity simultaneously and their ratio p/n tends to a positive constant $ c\in (0,1) $ c is an element of(0,1). We neither impose any distributional nor structural assumptions on the asset returns. For the developed theoretical framework, some regularity conditions, like the existence of the 4th moments, are needed. It is shown that two out of three quantities of interest are biased and overestimated by their sample counterparts under the high-dimensional asymptotic regime. This becomes evident based on the asymptotic deterministic equivalents of the sample plug-in estimators. Using them we construct consistent estimators of the three characteristics of the efficient frontier. Furthermore, the asymptotic normality of the considered estimators of the parameters of the efficient frontier is proved. Verifying the theoretical results based on an extensive simulation study we show that the proposed estimator for the efficient frontier is a valuable alternative to the sample estimator for high dimensional data. Finally, we present an empirical application, where we estimate the efficient frontier based on stocks from the S&P 500 index.

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Publication Details

Journal
European Journal of Finance
Published
2025-05-22
DOI
https://doi.org/10.1080/1351847x.2025.2505043
Citations
1
Primary Topic
Random Matrices and Applications
Type
article
Field-Weighted Citation Impact
2.63
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article

Consistent estimation of the high-dimensional efficient frontier

Taras Bodnar, Nikolaus Hautsch, Nestor Parolya, Yarema Okhrin
1 citations
European Journal of Finance
Random Matrices and Applications
2.63
article

Consistent estimation of the high-dimensional efficient frontier

Taras Bodnar, Nikolaus Hautsch, Nestor Parolya, Yarema Okhrin
article en
1 citations

Abstract

In this paper, we analyze the asymptotic behavior of the main characteristics of the mean-variance efficient frontier employing random matrix theory. Our particular interest covers the case when the dimension p and the sample size n tend to infinity simultaneously and their ratio p/n tends to a positive constant $ c\in (0,1) $ c is an element of(0,1). We neither impose any distributional nor structural assumptions on the asset returns. For the developed theoretical framework, some regularity conditions, like the existence of the 4th moments, are needed. It is shown that two out of three quantities of interest are biased and overestimated by their sample counterparts under the high-dimensional asymptotic regime. This becomes evident based on the asymptotic deterministic equivalents of the sample plug-in estimators. Using them we construct consistent estimators of the three characteristics of the efficient frontier. Furthermore, the asymptotic normality of the considered estimators of the parameters of the efficient frontier is proved. Verifying the theoretical results based on an extensive simulation study we show that the proposed estimator for the efficient frontier is a valuable alternative to the sample estimator for high dimensional data. Finally, we present an empirical application, where we estimate the efficient frontier based on stocks from the S&P 500 index.

European Journal of Finance
Linköping University (SE), Augsburg University (US), University of Vienna (AT), University of Augsburg (DE), Delft University of Technology (NL)
Openalex Percentile: Top 12%
Random Matrices and Applications
2.63
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