TY - JOUR T1 - Portfolio Selection Using Tikhonov Filtering to Estimate the Covariance Matrix JF - SIAM Journal on Financial Mathematics Y1 - 2010 A1 - Park,Sungwoo A1 - O'Leary, Dianne P. KW - covariance matrix estimate KW - Markowitz portfolio selection KW - ridge regression KW - Tikhonov regularization AB - Markowitz's portfolio selection problem chooses weights for stocks in a portfolio based on an estimated covariance matrix of stock returns. Our study proposes reducing noise in the estimation by using a Tikhonov filter function. In addition, we prevent rank deficiency of the estimated covariance matrix and propose a method for effectively choosing the Tikhonov parameter, which determines the filtering intensity. We put previous estimators into a common framework and compare their filtering functions for eigenvalues of the correlation matrix. We demonstrate the effectiveness of our estimator using stock return data from 1958 through 2007. VL - 1 UR - http://link.aip.org/link/?SJF/1/932/1 M3 - 10.1137/090749372 ER -