English

Squeezed Covariance Matrix Estimation: Analytic Eigenvalue Control

Portfolio Management 2025-12-30 v1

Abstract

We revisit Gerber's Informational Quality (IQ) framework, a data-driven approach for constructing correlation matrices from co-movement evidence, and address two obstacles that limit its use in portfolio optimization: guaranteeing positive semidefinite ness (PSD) and controlling spectral conditioning. We introduce a squeezing identity that represents IQ estimators as a convex-like combination of structured channel matrices, and propose an atomic-IQ parameterization in which each channel-class matrix is built from PSD atoms with a single class-level normalization. This yields constructive PSD guarantees over an explicit feasibility region, avoiding reliance on ex-post projection. To regulate conditioning, we develop an analytic eigen floor that targets either a minimum eigenvalue or a desired condition number and, when necessary, repairs PSD violations in closed form while remaining compatible with the squeezing identity. In long-only tangency back tests with transaction costs, atomic-IQ improves out-of-sample Sharpe ratios and delivers a more stable risk profile relative to a broad set of standard covariance estimators.

Cite

@article{arxiv.2512.23021,
  title  = {Squeezed Covariance Matrix Estimation: Analytic Eigenvalue Control},
  author = {Layla Abu Khalaf and William Smyth},
  journal= {arXiv preprint arXiv:2512.23021},
  year   = {2025}
}

Comments

46 pages, 1 figure

R2 v1 2026-07-01T08:43:35.060Z