Noise-proofing Universal Portfolio Shrinkage
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arXiv
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| Hauptverfasser: | , , |
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| Format: | Preprint |
| Veröffentlicht: |
2025
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| author | Ruelloux, Paul Bongiorno, Christian Challet, Damien |
| author_facet | Ruelloux, Paul Bongiorno, Christian Challet, Damien |
| contents | We enhance the Universal Portfolio Shrinkage Approximator (UPSA) of Kelly et al. (2023) by making it more robust with respect to estimation noise and covariate shift. UPSA optimizes the realized Sharpe ratio using a relatively small calibration window, leveraging ridge penalties and cross-validation to yield better portfolios. Yet, it still suffers from the staggering amount of noise in financial data. We propose two methods to make UPSA more robust and improve its efficiency: time-averaging of the optimal penalty weights and using the Average Oracle correlation eigenvalues to make covariance matrices less noisy and more robust to covariate shift. Combining these two long-term averages outperforms UPSA by a large margin in most specifications. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2511_10478 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Noise-proofing Universal Portfolio Shrinkage Ruelloux, Paul Bongiorno, Christian Challet, Damien Risk Management Portfolio Management We enhance the Universal Portfolio Shrinkage Approximator (UPSA) of Kelly et al. (2023) by making it more robust with respect to estimation noise and covariate shift. UPSA optimizes the realized Sharpe ratio using a relatively small calibration window, leveraging ridge penalties and cross-validation to yield better portfolios. Yet, it still suffers from the staggering amount of noise in financial data. We propose two methods to make UPSA more robust and improve its efficiency: time-averaging of the optimal penalty weights and using the Average Oracle correlation eigenvalues to make covariance matrices less noisy and more robust to covariate shift. Combining these two long-term averages outperforms UPSA by a large margin in most specifications. |
| title | Noise-proofing Universal Portfolio Shrinkage |
| topic | Risk Management Portfolio Management |
| url | https://arxiv.org/abs/2511.10478 |