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Bayesian Inference For The Tangent Portfolio

Author

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  • DAVID BAUDER

    (Department of Mathematics, Humboldt-University of Berlin, D-10099 Berlin, Germany)

  • TARAS BODNAR

    (Department of Mathematics, Stockholm University, SE-10691 Stockholm, Sweden)

  • STEPAN MAZUR

    (Department of Statistics, School of Business, Örebro University, SE-70281 Örebro, Sweden)

  • YAREMA OKHRIN

    (Department of Statistics, University of Augsburg, D-86159 Augsburg, Germany)

Abstract

In this paper, we consider the estimation of the weights of tangent portfolios from the Bayesian point of view assuming normal conditional distributions of the logarithmic returns. For diffuse and conjugate priors for the mean vector and the covariance matrix, we derive stochastic representations for the posterior distributions of the weights of tangent portfolio and their linear combinations. Separately, we provide the mean and variance of the posterior distributions, which are of key importance for portfolio selection. The analytic results are evaluated within a simulation study, where the precision of coverage intervals is assessed.

Suggested Citation

  • David Bauder & Taras Bodnar & Stepan Mazur & Yarema Okhrin, 2018. "Bayesian Inference For The Tangent Portfolio," Journal of Enterprising Culture (JEC), World Scientific Publishing Co. Pte. Ltd., vol. 21(08), pages 1-27, December.
    • Handle: RePEc:wsi:jecxxx:v:26:y:2018:i:03:n:s0219024918500541
    DOI: 10.1142/S0219024918500541
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    References listed on IDEAS

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    Cited by:

    1. Mårten Gulliksson & Stepan Mazur, 2020. "An Iterative Approach to Ill-Conditioned Optimal Portfolio Selection," Computational Economics, Springer;Society for Computational Economics, vol. 56(4), pages 773-794, December.
    2. Wang, Chou-Wen & Liu, Kai & Li, Bin & Tan, Ken Seng, 2022. "Portfolio optimization under multivariate affine generalized hyperbolic distributions," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 49-66.
    3. Gulliksson, Mårten & Oleynik, Anna & Mazur, Stepan, 2021. "Portfolio Selection with a Rank-deficient Covariance Matrix," Working Papers 2021:12, Örebro University, School of Business.
    4. Javed, Farrukh & Mazur, Stepan & Thorsén, Erik, 2021. "Tangency portfolio weights under a skew-normal model in small and large dimensions," Working Papers 2021:13, Örebro University, School of Business.
    5. Bodnar, Taras & Mazur, Stepan & Nguyen, Hoang, 2022. "Estimation of optimal portfolio compositions for small sampleand singular covariance matrix," Working Papers 2022:15, Örebro University, School of Business.
    6. Drin, Svitlana & Mazur, Stepan & Muhinyuza, Stanislas, 2023. "A test on the location of tangency portfolio for small sample size and singular covariance matrix," Working Papers 2023:11, Örebro University, School of Business.
    7. Gulliksson, Mårten & Mazur, Stepan, 2019. "An Iterative Approach to Ill-Conditioned Optimal Portfolio Selection," Working Papers 2019:3, Örebro University, School of Business.
    8. Alfelt, Gustav & Mazur, Stepan, 2020. "On the mean and variance of the estimated tangency portfolio weights for small samples," Working Papers 2020:8, Örebro University, School of Business.
    9. Karlsson, Sune & Mazur, Stepan & Muhinyuza, Stanislas, 2020. "Statistical Inference for the Tangency Portfolio in High Dimension," Working Papers 2020:10, Örebro University, School of Business.

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