Approach portfolio selection for Vietnamese stock market based on nonlinear shrinkage method

In quantitative finance, estimation of the covariance matrix of all assets in a portfolio is extremely important. From this, we can derive approximately the weight of each asset in our investment and evaluate the performance of the target trading strategy via a backtesting system. In this paper, our contribution is two folds. First, taking into account the well-known nonlinear shrinkage estimation approach from Ledoit-Wolf for estimating the covariance matrix of stocks in general frameworks, we adapt it to the Vietnam stock market and gain impressive results compared with the other popular methods. In our approach, we also add the transaction cost at a level of 0.3% in the Vietnam market. For the second contribution, we provide a customized backtesting system and can prove its effectiveness experimentally to the real stock data from HOSE. Our study is expected to be a good reference for investors following the quantitative approach, especially for the Vietnam stocks market.