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Asymptotic and Bayesian Confidence Intervals for Sharpe Style Weights

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  • Kim, Tae-Hwan
  • White, Halbert
  • Stone, Douglas

Abstract

Sharpe style regression has become a widespread analytic tool in the financial community. The style regression allows one to investigate such interesting issues as style composition, style sensitivity, and style change over time. All previous methods to obtain the distribution and confidence intervals of the style coefficients are statistically valid only in the special case in which none of the true style weights are zero or one. In practice it is quite plausible to have zero or one for the values of some style weights. In this paper we apply new results of Andrews (1997a, 1999) and develop a comparable Bayesian method to obtain statistically valid distributions and confidence intervals regardless of the true values of style weights.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt5h98h28m.

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Date of creation: 01 Oct 2000
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Handle: RePEc:cdl:ucsdec:qt5h98h28m

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Keywords: Sharpe style regression; non-negativity; linear-quadratic optimization; prior density; bayesian highest posterior density interval;

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References

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  1. Donald W. K. Andrews, 2000. "Inconsistency of the Bootstrap when a Parameter Is on the Boundary of the Parameter Space," Econometrica, Econometric Society, vol. 68(2), pages 399-406, March.
  2. Kloek, Tuen & van Dijk, Herman K, 1978. "Bayesian Estimates of Equation System Parameters: An Application of Integration by Monte Carlo," Econometrica, Econometric Society, vol. 46(1), pages 1-19, January.
  3. D. N. Graham, 1961. "Discussion," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 9(1), pages 54-55, 03.
  4. Donald W. K. Andrews, 1999. "Estimation When a Parameter Is on a Boundary," Econometrica, Econometric Society, vol. 67(6), pages 1341-1384, November.
  5. Geweke, John, 1986. "Exact Inference in the Inequality Constrained Normal Linear Regression Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(2), pages 127-41, April.
  6. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
  7. Donald W.K. Andrews, 1997. "Estimation When a Parameter Is on a Boundary: Theory and Applications," Cowles Foundation Discussion Papers 1153, Cowles Foundation for Research in Economics, Yale University.
  8. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
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Citations

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Cited by:
  1. Laurens Swinkels, Pieter Jelle VanDerSluis, 2001. "Return-based Style Analysis with Time-varying Exposures," Computing in Economics and Finance 2001 125, Society for Computational Economics.
  2. ter Horst, Jenke R. & Nijman, Theo E. & de Roon, Frans A., 2004. "Evaluating style analysis," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 29-53, January.
  3. Lorenzo Camponovo & Olivier Scaillet & Fabio Trojani, 2006. "Robust Subsampling," Swiss Finance Institute Research Paper Series 06-33, Swiss Finance Institute.
  4. Pattarin, Francesco & Paterlini, Sandra & Minerva, Tommaso, 2004. "Clustering financial time series: an application to mutual funds style analysis," Computational Statistics & Data Analysis, Elsevier, vol. 47(2), pages 353-372, September.
  5. Alessandro Bucciol & Raffaele Miniaci, 2006. "Optimal Asset Allocation Based on Utility Maximization in the Presence of Market Frictions," Working Papers ubs0605, University of Brescia, Department of Economics.
  6. G. Christodoulakis & E. Mamatzakis, 2010. "Return attribution analysis of the UK insurance portfolios," Annals of Finance, Springer, vol. 6(3), pages 405-420, July.

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