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Bayesian inference for the tangent portfolio

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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 di↵use 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.

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  • Bauder, David & Bodnar, Taras & Mazur, Stepan & Okhrin, Yarema, 2018. "Bayesian inference for the tangent portfolio," Working Papers 2018:2, Örebro University, School of Business.
  • Handle: RePEc:hhs:oruesi:2018_002
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    8. Golosnoy, Vasyl & Okhrin, Yarema, 2008. "General uncertainty in portfolio selection: A case-based decision approach," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 718-734, September.
    9. Vasyl Golosnoy & Yarema Okhrin, 2007. "Multivariate Shrinkage for Optimal Portfolio Weights," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 441-458.
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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. Gulliksson, Mårten & Oleynik, Anna & Mazur, Stepan, 2021. "Portfolio Selection with a Rank-deficient Covariance Matrix," Working Papers 2021:12, Örebro University, School of Business.
    3. 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.
    4. Gulliksson, Mårten & Mazur, Stepan, 2019. "An Iterative Approach to Ill-Conditioned Optimal Portfolio Selection," Working Papers 2019:3, Örebro University, School of Business.
    5. 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.
    6. 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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    More about this item

    Keywords

    asset allocation; tangent portfolio; Bayesian analysis;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory

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