Shrinkage Methods

The akutan open source project includes code that implements a few shrinkage methods. Spherical shrinkage is the latest one. It comes from Attilio Meucci's book. I've also revisited and finally found and fixed the bugs in the Ledoit-Wolf shrinkage code. I haven't updated the applet, but CVS has been updated.

It is interesting to compare the efficient frontier drawn for these two methods, the Ledoit-Wolf shrinkage frontier is very close and just to the right of the "standard" efficient frontier. When you look at the portfolios you see they are more diversified than those on the "standard" efficient frontier. When you consider spherical shrinkage, the efficient frontier can be far to the right in parts and then for the example I was considering, was actually to the left of the "standard" efficient frontier. This is because the spherical shrinkage also shrinks the means, so the efficient frontier can move both in the risk direction and the return direction.