Hierarchical Bayes Methods for Multifactor Model Estimation and Portfolio Selection
The factor model is an important construct for both portfolio managers and researchers in modern finance. For practitioners, factor model coefficients are used to guide the construction of optimal portfolios. For academicians, factor model parameters play a fundamental role in explaining equilibrium asset prices and other market phenomena. This paper presents a hierarchical modeling procedure that can substantially improve the accuracy of factor model parameter estimates through incorporation of cross-sectional information. It is shown that this improvement in parameter estimation accuracy translates into substantial improvement in portfolio performance. Expressions are derived that characterize the sensitivity of portfolio performance to parameter estimation error. Evidence with NYSE data suggests that the hierarchical estimation technique leads to superior out-of-sample portfolio performance when compared to alternative estimation approaches.
Volume (Year): 44 (1998)
Issue (Month): 11-Part-2 (November)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 279-292, September.
- Chib, Siddhartha & Greenberg, Edward, 1994. "Bayes inference in regression models with ARMA (p, q) errors," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 183-206.
- Barnett, Glen & Kohn, Robert & Sheather, Simon, 1996.
"Bayesian estimation of an autoregressive model using Markov chain Monte Carlo,"
Journal of Econometrics,
Elsevier, vol. 74(2), pages 237-254, October.
- Barnett, G. & Kohn, R. & Sheather, S., "undated". "Bayesian Estimation of an Autoregressive Model Using Markov Chain Monte Carlo," Statistics Working Paper _001, Australian Graduate School of Management.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-342.
- Chan, K C & Chen, Nai-Fu, 1988. " An Unconditional Asset-Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk," Journal of Finance, American Finance Association, vol. 43(2), pages 309-325, June.
- Allenby, Greg M & Lenk, Peter J, 1995. "Reassessing Brand Loyalty, Price Sensitivity, and Merchandising Effects on Consumer Brand Choice," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 281-289, July.
- Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
- Frost, Peter A. & Savarino, James E., 1986. "An Empirical Bayes Approach to Efficient Portfolio Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 293-305, September.
- Vasicek, Oldrich A, 1973. "A Note on Using Cross-Sectional Information in Bayesian Estimation of Security Betas," Journal of Finance, American Finance Association, vol. 28(5), pages 1233-1239, December.
- Rosenberg, Barr & McKibben, Walt, 1973. "The Prediction of Systematic and Specific Risk in Common Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(02), pages 317-333, March.
- G. Andrew Karolyi, 1992. "Predicting Risk: Some New Generalizations," Management Science, INFORMS, vol. 38(1), pages 57-74, January.
- Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:44:y:1998:i:11-part-2:p:s111-s124. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.