IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v18y2005i2p673-705.html
   My bibliography  Save this article

A Shrinkage Approach to Model Uncertainty and Asset Allocation

Author

Listed:
  • Zhenyu Wang

Abstract

This article takes a shrinkage approach to examine the empirical implications of aversion to model uncertainty. The shrinkage approach explicitly shows how predictive distributions incorporate data and prior beliefs. It enables us to solve the optimal portfolios for uncertainty-averse investors. Aversion to uncertainty about the capital asset pricing model leads investors to hold a portfolio that is not mean-variance efficient for any predictive distribution. However, mean-variance efficient portfolios corresponding to extremely strong beliefs in the Fama--French model are approximately optimal for uncertainty-averse investors. The empirical Bayes approach does not result in optimal portfolios for investors who are averse to model uncertainty. Copyright 2005, Oxford University Press.

Suggested Citation

  • Zhenyu Wang, 2005. "A Shrinkage Approach to Model Uncertainty and Asset Allocation," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 673-705.
  • Handle: RePEc:oup:rfinst:v:18:y:2005:i:2:p:673-705
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhi014
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:18:y:2005:i:2:p:673-705. 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: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sfsssea.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.