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A well-conditioned estimator for large-dimensional covariance matrices. (English) Zbl 1032.62050
Summary: Many applied problems require a covariance matrix estimator that is not only invertible, but also well-conditioned (that is, inverting it does not amplify estimation error). For large-dimensional covariance matrices, the usual estimator – the sample covariance matrix – is typically not well-conditioned and may not even be invertible. This paper introduces an estimator that is both well-conditioned and more accurate than the sample covariance matrix asymptotically. This estimator is distribution-free and has a simple explicit formula that is easy to compute and interpret. It is the asymptotically optimal convex linear combination of the sample covariance matrix with the identity matrix. Optimality is meant with respect to a quadratic loss function, asymptotically as the number of observations and the number of variables go to infinity together. Extensive Monte Carlo results confirm that the asymptotic results tend to hold well in finite samples.

MSC:
62H12 Estimation in multivariate analysis
62C12 Empirical decision procedures; empirical Bayes procedures
62G05 Nonparametric estimation
62J07 Ridge regression; shrinkage estimators (Lasso)
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