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Bayesian Portfolio Selection in a Markov Switching Gaussian Mixture Model

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  • Qian, Hang
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    Abstract

    Departure from normality poses implementation barriers to the Markowitz mean-variance portfolio selection. When assets are affected by common and idiosyncratic shocks, the distribution of asset returns may exhibit Markov switching regimes and have a Gaussian mixture distribution conditional on each regime. The model is estimated in a Bayesian framework using the Gibbs sampler. An application to the global portfolio diversification is also discussed.

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    File URL: http://mpra.ub.uni-muenchen.de/35561/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35561.

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    Date of creation: 24 Dec 2011
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    Handle: RePEc:pra:mprapa:35561

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    Keywords: Portfolio; Bayesian; Hidden Markov Model; Gaussian Mixture;

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    17. Kraus, Alan & Litzenberger, Robert H, 1976. "Skewness Preference and the Valuation of Risk Assets," Journal of Finance, American Finance Association, vol. 31(4), pages 1085-1100, September.
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