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Bayesian Inference and Portfolio Efficiency

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  • Kandel, S.
  • McCulloch, R.
  • Stambaugh, R.F.

Abstract

A Bayesian approach is used to investigate a sample's information about a portfolio's degree of inefficiency. With standard diffuse priors, posterior distributions for measures of portfolio inefficiency can concentrate well away from values consistent with efficiency, even when the portfolio is exactly efficient in the sample. The data indicate that the NYSE - AMEX market portfolio is rather inefficient in the presence of a riskless asset, although this conclusion is justified only after an analysis using informative priors. Including a riskless asset significantly reduces any sample's ability to produce posterior distributions supporting small degrees of inefficiency. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
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Suggested Citation

  • Kandel, S. & McCulloch, R. & Stambaugh, R.F., 1991. "Bayesian Inference and Portfolio Efficiency," Weiss Center Working Papers 8-91, Wharton School - Weiss Center for International Financial Research.
    • Handle: RePEc:fth:pennif:8-91
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    References listed on IDEAS

    as
    1. Geweke, John, 1989. "Bayesian Inference in Econometric Models Using Monte Carlo Integration," Econometrica, Econometric Society, vol. 57(6), pages 1317-1339, November.
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