Review of Financial Studies 2026

Universal Portfolio Shrinkage

Bryan Kelly¹; Semyon Malamud^2,3; Mo Pourmohammadi⁴; Fabio Trojani⁵

¹ Yale School of Management, AQR Capital Management, and NBER , the · ² Swiss Finance Institute and EPFL , Switzerland, and , London · ³ CEPR , Switzerland, and , London · ⁴ Yale School of Management , the · ⁵ University of Geneva and Swiss Finance Institute

Abstract

We introduce a nonlinear covariance shrinkage method for building optimal portfolios. Our universal portfolio shrinkage approximator (UPSA) is built from closed-form basis portfolios, is cheap to implement, and improves on existing shrinkage methods. Rather than uniformly penalizing all principal components of returns or discarding low-variance ones, UPSA instead reweights components to explicitly optimize expected out-of-sample portfolio performance. In empirical applications using a large cross-section of anomaly factors, it delivers robust improvements over alternative shrinkage methods in the literature.

DOI

10.1093/rfs/hhag084

Language

en

Sources

crossref openalex

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓