TY - JOUR T1 - Multi-Index Shrinkage Estimation JF - The Journal of Wealth Management SP - 73 LP - 79 DO - 10.3905/jwm.2005.502670 VL - 8 IS - 1 AU - Michael D. Bergmann AU - C. Thomas Howard Y1 - 2005/04/30 UR - https://pm-research.com/content/8/1/73.abstract N2 - 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. ER -