Multifactor Efficiency and Bayesian Inference
AbstractThis article reinvestigates the performance of risk-based multifactor models. We generalize the Bayesian methodology of Shanken and Kandel, McCulloch, and Stambaugh from mean-variance to multifactor efficiency. Using informative priors, our flexible framework handles severe small-sample problems. We introduce a new inefficiency metric that measures the maximum correlation between the market portfolio and any multifactor-efficient portfolio. Finally, we present new empirical evidence that neither the two additional Fama-French factors nor the momentum factor move the market portfolio robustly closer to being multifactor efficient or robustly decrease pricing errors relative to the Capital Asset Pricing Model.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 79 (2006)
Issue (Month): 6 (November)
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Web page: http://www.journals.uchicago.edu/JB/
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