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Jose Menchero, Bloomberg: Solving the “Curse of Dimensionality” Problem in Multi-Asset-Class Risk Models
February 22, 2018 @ 12:30 pm - 2:00 pm
Estimating a robust risk model risk for a portfolio that spans multiple asset classes is a challenging task due to the “curse of dimensionality” (i.e., the problem of estimating too many relationships from too few observations). While the sample covariance matrix is easily computed, it is susceptible to capturing spurious relationships that make it unsuitable for portfolio construction purposes. In this talk, we present a new approach for constructing risk models that span multiple asset classes. We also discuss the implications for portfolio risk management and portfolio construction.Download the slides from this presentation: New MAC2 Slide Deck