Static and dynamic portfolio construction with economic and statistical shrinkage

In this paper I construct 6 portfolios based on static and dynamic policies. The dynamic portfolios are based on theorem provided by DeMiguel et al. (2015). The paper studies the impact of shrinkage, economic as well as statistic, on multi-period portfolio performance and compares those with a static portfolio which trades towards a robust target portfolio Wang & Taylor (2018). Performance of the portfolios is compared with Sharpe ratios. I find that shrinkage can improve portfolio performance, but it needs to be done carefully. Using the wrong shrinkage target can worsen performance. The portfolio with the highest Sharp ratio is a four fund shrinkage portfolio with a estimated covariance matrix shrunk to a homoscedastic shrinkage target.