A Comparative Study on Jorion’s Estimator in Contemporary Market

Abstract

In knowledge of the prominence of Markowitz model in modern portfolio theory, and the following controversy on the appropriate choices of input parameters, this study examines the practical performance of Jorion's estimator as one of the estimation strategies to reduce the estimation error inherent in traditional input parameter. A comprehensive dataset of real stock market returns, encompassing 7 assets and 2 industries, is employed. Jorion's estimator entails the adjustment of the mean of sample return towards the mean of minimum variance portfolio. The results are then integrated into the optimization phase of Markowitz model. To evaluate the effectiveness of Jorion’s estimator, realized returns and return volatility of Markowitz model adapted by Jorion’s estimator are compared against the traditional model. The findings provide insights into the practicability of Jorion's estimator for portfolio management in contemporary capital market. After comparisons, all 3 measures of realized returns from Jorion’s estimator outperforms the counterpart from traditional parameter. This study affirms that the classic sample mean is inadequate as an estimator for future performance, and sophisticated techniques, such as Jorion’s estimator should be employed in real-world investment strategies.