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August 2022 Quadratic shrinkage for large covariance matrices
Olivier Ledoit, Michael Wolf
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Bernoulli 28(3): 1519-1547 (August 2022). DOI: 10.3150/20-BEJ1315

Abstract

This paper constructs a new estimator for large covariance matrices by drawing a bridge between the classic (Stein (1975)) estimator in finite samples and recent progress under large-dimensional asymptotics. The estimator keeps the eigenvectors of the sample covariance matrix and applies shrinkage to the inverse sample eigenvalues. The corresponding formula is quadratic: it has two shrinkage targets weighted by quadratic functions of the concentration (that is, matrix dimension divided by sample size). The first target dominates mid-level concentrations and the second one higher levels. This extra degree of freedom enables us to outperform linear shrinkage when the optimal shrinkage is not linear, which is the general case. Both of our targets are based on what we term the “Stein shrinker”, a local attraction operator that pulls sample covariance matrix eigenvalues towards their nearest neighbors, but whose force diminishes with distance (like gravitation). We prove that no cubic or higher-order nonlinearities beat quadratic with respect to Frobenius loss under large-dimensional asymptotics. Non-normality and the case where the matrix dimension exceeds the sample size are accommodated. Monte Carlo simulations confirm state-of-the-art performance in terms of accuracy, speed, and scalability.

Acknowledgements

We thank an associate editor and three anonymous referees for helpful comments that have greatly enhanced the exposition of the paper. We also thank Patrick Ledoit for acting in the capacity of a research assistant by writing the Python version of our Matlab programming code in Section A of the supplementary material Ledoit and Wolf (2022).

Citation

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Olivier Ledoit. Michael Wolf. "Quadratic shrinkage for large covariance matrices." Bernoulli 28 (3) 1519 - 1547, August 2022. https://doi.org/10.3150/20-BEJ1315

Information

Received: 1 November 2019; Published: August 2022
First available in Project Euclid: 25 April 2022

Digital Object Identifier: 10.3150/20-BEJ1315

Keywords: Inverse shrinkage , Kernel estimation , Large-dimensional asymptotics , signal amplitude , Stein shrinkage

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Vol.28 • No. 3 • August 2022
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