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Post-Processed Posteriors for Sparse Covariances and Its Application to Global Minimum Variance Portfolio

Statistics Theory 2021-08-24 v1 Methodology Statistics Theory

Abstract

We consider Bayesian inference of sparse covariance matrices and propose a post-processed posterior. This method consists of two steps. In the first step, posterior samples are obtained from the conjugate inverse-Wishart posterior without considering the sparse structural assumption. The posterior samples are transformed in the second step to satisfy the sparse structural assumption through the hard-thresholding function. This non-traditional Bayesian procedure is justified by showing that the post-processed posterior attains the optimal minimax rates. We also investigate the application of the post-processed posterior to the estimation of the global minimum variance portfolio. We show that the post-processed posterior for the global minimum variance portfolio also attains the optimal minimax rate under the sparse covariance assumption. The advantages of the post-processed posterior for the global minimum variance portfolio are demonstrated by a simulation study and a real data analysis with S&P 400 data.

Keywords

Cite

@article{arxiv.2108.09462,
  title  = {Post-Processed Posteriors for Sparse Covariances and Its Application to Global Minimum Variance Portfolio},
  author = {Kwangmin Lee and Jaeyong Lee},
  journal= {arXiv preprint arXiv:2108.09462},
  year   = {2021}
}

Comments

19 pages, 3 figures, 1 supplementary material