%0 Journal Article %A Michael D. Bergmann %A C. Thomas Howard %T Multi-Index Shrinkage Estimation %B Theory and Empirical Tests %D 2005 %R 10.3905/jwm.2005.502670 %J The Journal of Wealth Management %P 73-79 %V 8 %N 1 %X The authors present an improved method for estimating the asset class covariance matrix for input into a mean variance optimizer. Starting with the Ledoit and Wolf [2003] stock level Bayesian shrinkage estimator, they derive a multi-index shrinkage estimator for capturing the actual asset class return structure and for estimating the covariance matrix. They test this multi-index estimator relative to the historical covariance matrix and single-index estimator. Using annual return data for 13 asset classes over the period 1960 through 2002, they find that the multi-index estimator outperforms both of the alternative estimation methods in terms of mean squared error in forecasting the actual covariance matrix and in terms of forming one-, two-, and three-years-ahead minimum-risk portfolios. %U https://jwm.pm-research.com/content/iijwealthmgmt/8/1/73.full.pdf