English

Recovering Model Structures from Large Low Rank and Sparse Covariance Matrix Estimation

Methodology 2015-03-19 v2 Portfolio Management Statistical Finance

Abstract

Many popular statistical models, such as factor and random effects models, give arise a certain type of covariance structures that is a summation of low rank and sparse matrices. This paper introduces a penalized approximation framework to recover such model structures from large covariance matrix estimation. We propose an estimator based on minimizing a non-likelihood loss with separable non-smooth penalty functions. This estimator is shown to recover exactly the rank and sparsity patterns of these two components, and thus partially recovers the model structures. Convergence rates under various matrix norms are also presented. To compute this estimator, we further develop a first-order iterative algorithm to solve a convex optimization problem that contains separa- ble non-smooth functions, and the algorithm is shown to produce a solution within O(1/t^2) of the optimal, after any finite t iterations. Numerical performance is illustrated using simulated data and stock portfolio selection on S&P 100.

Keywords

Cite

@article{arxiv.1111.1133,
  title  = {Recovering Model Structures from Large Low Rank and Sparse Covariance Matrix Estimation},
  author = {Xi Luo},
  journal= {arXiv preprint arXiv:1111.1133},
  year   = {2015}
}

Comments

35 pages, 3 figures. Presented at JSM 2011 and various invited seminars since February, 2011. R package available from http://cran.r-project.org/web/packages/lorec/index.html

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