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Bayesian Portfolio Analysis

Author

Listed:
  • Doron Avramov
  • Guofu Zhou

    (Finance Department, The Hebrew University of Jerusalem, Mt. Scopus Jerusalem 91905, Israel; R.H. Smith School of Business, University of Maryland, College Park, Maryland 20742
    Olin Business School, Washington University, St. Louis, Missouri 63130)

Abstract

This paper reviews the literature on Bayesian portfolio analysis. Information about events, macro conditions, asset pricing theories, and security-driving forces can serve as useful priors in selecting optimal portfolios. Moreover, parameter uncertainty and model uncertainty are practical problems encountered by all investors. The Bayesian framework neatly accounts for these uncertainties, whereas standard statistical models often ignore them. We review Bayesian portfolio studies when asset returns are assumed both independently and identically distributed as well as predictable through time. We cover a range of applications, from investing in single assets and equity portfolios to mutual and hedge funds. We also outline challenges for future work.

Suggested Citation

  • Doron Avramov & Guofu Zhou, 2010. "Bayesian Portfolio Analysis," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 25-47, December.
    • Handle: RePEc:anr:refeco:v:2:y:2010:p:25-47
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    References listed on IDEAS

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    More about this item

    Keywords

    portfolio choice; parameter uncertainty; informative prior beliefs; return predictability; model uncertainty; learning;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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