The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps
Published: 07/15/2003 | DOI: 10.1111/1540-6261.00580
Ravi Jagannathan, Tongshu Ma
Green and Hollifield (1992) argue that the presence of a dominant factor would result in extreme negative weights in mean‐variance efficient portfolios even in the absence of estimation errors. In that case, imposing no‐short‐sale constraints should hurt, whereas empirical evidence is often to the contrary. We reconcile this apparent contradiction. We explain why constraining portfolio weights to be nonnegative can reduce the risk in estimated optimal portfolios even when the constraints are wrong. Surprisingly, with no‐short‐sale constraints in place, the sample covariance matrix performs as well as covariance matrix estimates based on factor models, shrinkage estimators, and daily data.
A Note on “Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps”
Published: 07/02/2019 | DOI: 10.1111/jofi.12824
RAVI JAGANNATHAN, TONGSHU MA, JIAQI ZHANG
This note corrects an error in the proof of Proposition 2 of “Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraint Helps” that appeared in the Journal of Finance, August 2003.