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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Spectrum estimation: a unified framework for covariance matrix estimation and PCA in large dimensions
Organization Unit
  • Olivier Ledoit
  • Michael Wolf
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 105
ISSN 1664-7041
Number of Pages 40
Date 2013
Abstract Text 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 both statistical problems: nonlinear shrinkage of the eigenvalues of the sample covariance matrix. The optimal nonlinear shrinkage formula depends on unknown population quantities and is thus not available. It is, however, possible to consistently estimate an oracle nonlinear shrinkage, which is motivated on asymptotic grounds. A key tool to this end is consistent estimation of the set of eigenvalues of the population covariance matrix (also known as the spectrum), an interesting and challenging problem in its own right. Extensive Monte Carlo simulations demonstrate that our methods have desirable finite-sample properties and outperform previous proposals.
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Keywords Large-dimensional asymptotics, covariance matrix eigenvalues, nonlinear shrinkage, principal component analysis, Korrelationsmatrix, Korrelationsanalyse, Nichtlineare Analysis, Hauptkomponentenanalyse
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