Financial Markets and Portfolio Management

, Volume 29, Issue 1, pp 31–59 | Cite as

Covariance averaging for improved estimation and portfolio allocation

  • Fotis PapailiasEmail author
  • Dimitrios D. Thomakos


We propose a new method for estimating the covariance matrix of a multivariate time series of financial returns. The method is based on estimating sample covariances from overlapping windows of observations which are then appropriately weighted to obtain the final covariance estimate. We extend the idea of (model) covariance averaging offered in the covariance shrinkage approach by means of greater ease of use, flexibility and robustness in averaging information over different data segments. The suggested approach does not suffer from the curse of dimensionality and can be used without problems of either approximation or any demand for numerical optimization.


Averaging Covariance estimation Portfolio allocation  Rolling window 

JEL Classification

C32 C58 G11 



The authors are very grateful for helpful comments from the editor and an anonymous referee. Any remaining errors are our responsibility.


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Copyright information

© Swiss Society for Financial Market Research 2014

Authors and Affiliations

  1. 1.Quantf ResearchBelfastUK
  2. 2.Queen’s University Management SchoolQueen’s University BelfastBelfastNorthern Ireland, UK
  3. 3.Department of EconomicsUniversity of PeloponnesePeloponneseGreece
  4. 4.Rimini Center for Economic AnalysisRiminiItaly

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