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Asymptotic and Bayesian Confidence Intervals for Sharpe Style Weights

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  • Kim, Tae-Hwan
  • White, Halbert
  • Stone, Douglas

Abstract

Sharpe style regression has become a widespread analytic tool in the financial community. The style regression allows one to investigate such interesting issues as style composition, style sensitivity, and style change over time. All previous methods to obtain the distribution and confidence intervals of the style coefficients are statistically valid only in the special case in which none of the true style weights are zero or one. In practice it is quite plausible to have zero or one for the values of some style weights. In this paper we apply new results of Andrews (1997a, 1999) and develop a comparable Bayesian method to obtain statistically valid distributions and confidence intervals regardless of the true values of style weights.

Suggested Citation

  • Kim, Tae-Hwan & White, Halbert & Stone, Douglas, 2000. "Asymptotic and Bayesian Confidence Intervals for Sharpe Style Weights," University of California at San Diego, Economics Working Paper Series qt5h98h28m, Department of Economics, UC San Diego.
  • Handle: RePEc:cdl:ucsdec:qt5h98h28m
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    References listed on IDEAS

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    1. Geweke, John, 1986. "Exact Inference in the Inequality Constrained Normal Linear Regression Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(2), pages 127-141, April.
    2. Kloek, Tuen & van Dijk, Herman K, 1978. "Bayesian Estimates of Equation System Parameters: An Application of Integration by Monte Carlo," Econometrica, Econometric Society, vol. 46(1), pages 1-19, January.
    3. Donald W. K. Andrews, 2000. "Inconsistency of the Bootstrap when a Parameter Is on the Boundary of the Parameter Space," Econometrica, Econometric Society, vol. 68(2), pages 399-406, March.
    4. Donald W. K. Andrews, 1999. "Estimation When a Parameter Is on a Boundary," Econometrica, Econometric Society, vol. 67(6), pages 1341-1384, November.
    5. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
    6. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
    7. D. N. Graham, 1961. "Discussion," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 9(1), pages 54-55, March.
    8. Donald W.K. Andrews, 1997. "Estimation When a Parameter Is on a Boundary: Theory and Applications," Cowles Foundation Discussion Papers 1153, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. ter Horst, Jenke R. & Nijman, Theo E. & de Roon, Frans A., 2004. "Evaluating style analysis," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 29-53, January.
    2. Fricke, Christoph & Fricke, Daniel, 2017. "Vulnerable Funds?," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168209, Verein für Socialpolitik / German Economic Association.
    3. G. Christodoulakis & E. Mamatzakis, 2010. "Return attribution analysis of the UK insurance portfolios," Annals of Finance, Springer, vol. 6(3), pages 405-420, July.
    4. Camponovo, Lorenzo & Scaillet, Olivier & Trojani, Fabio, 2012. "Robust subsampling," Journal of Econometrics, Elsevier, vol. 167(1), pages 197-210.
    5. Laurens Swinkels & Pieter Van Der Sluis, 2006. "Return-based style analysis with time-varying exposures," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 529-552.
    6. Alessandro Bucciol & Raffaele Miniaci, 2006. "Optimal Asset Allocation Based on Utility Maximization in the Presence of Market Frictions," Working Papers ubs0605, University of Brescia, Department of Economics.
    7. George Christodoulakis, 2002. "Sharp Style Analysis in the MSCI Sector Portfolios: A Monte Caro Integration Approach," Working Papers wp02-06, Warwick Business School, Finance Group.
    8. Pattarin, Francesco & Paterlini, Sandra & Minerva, Tommaso, 2004. "Clustering financial time series: an application to mutual funds style analysis," Computational Statistics & Data Analysis, Elsevier, vol. 47(2), pages 353-372, September.

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