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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Nonlinear Shrinkage Estimation of Large-Dimensional Covariance Matrices |
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| Institution | University of Zurich |
| Series Name | Working paper series / Institute for Empirical Research in Economics |
| Number | No. 515 |
| ISSN | 1424-0459 |
| Number of Pages | 16 |
| Date | 2011 |
| Abstract Text | 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 happens frequently, the sample covariance matrix is known to perform poorly and may suffer from ill-conditioning. There already exists an extensive literature concerning improved estimators in such situations. In the absence of further knowledge about the structure of the true covariance matrix, the most successful approach so far, arguably, has been shrinkage estimation. Shrinking the sample covariance matrix to a multiple of the identity, by taking a weighted average of the two, turns out to be equivalent to linearly shrinking the sample eigenvalues to their grand mean, while retaining the sample eigenvectors. Our paper extends this approach by considering nonlinear transformations of the sample eigenvalues. We show how to construct an estimator that is asymptotically equivalent to an oracle estimator suggested in previous work. As demonstrated in extensive Monte Carlo simulations, the resulting bona fide estimator can result in sizeable improvements over the sample covariance matrix and also over linear shrinkage. |
| Official URL | http://www.iew.unizh.ch/wp/iewwp515.pdf |
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| Keywords | Large-dimensional asymptotics, nonlinear shrinkage, rotation equivariance |
| Additional Information | Revised version |