JAMES-STEIN TYPE ESTIMATORS IN LARGE SAMPLES WITH APPLICATION TO THE LEAST ABSOLUTE DEVIATION ESTIMATOR BY TAE-HWAN KIM AND HALBERT WHITE DISCUSSION PAPER 99-04 FEBRUARY 1999 James-Stein Type Estimators in Large Samples with Application to The Least Absolute Deviation Estimator

We explore the extension of James-Stein type estimators in a direction that enables them to preserve their superiority when the sample size goes to infinity. Instead of shrinking a base estimator towards a fixed point, we shrink it towards a data-dependent point, which makes it possible that the “prior” becomes more accurate as the sample size grows. We provide an analytic expression for the asymptotic risk of James-Stein type estimators shrunk towards a datadependent point and prove that they have smaller asymptotic risk than the base estimator. Shrinking an estimator toward a data-dependent point turns out to be equivalent to combining two random variables using the James-Stein rule. We propose a general combination scheme which includes random combination (the James-Stein combination) and the usual nonrandom combination as special cases. As an example, we apply our method to combine the Least Absolute Deviations estimator and the Least Squares estimator. Our simulation study indicates that the resulting combination estimators have desirable finite sample properties when errors are drawn from symmetric distributions. Finally, using stock return data we present some empirical evidence that the combination estimators have the potential to improve out-of-sample prediction in terms of both mean square error and mean absolute error.