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Analyzing Investments Whose Histories Differ in Length

  • Robert F. Stambaugh

This study explores multivariate methods for investment analysis based on a sample of return histories that differ in length across assets. The longer histories provide greater information about moments of returns, not only for the longer-history assets, but for the shorter-history assets as well. To account for the remaining parameter uncertainty, or estimation risk,' portfolio opportunities are characterized by a Bayesian predictive distribution. Examples involving emerging markets demonstrate the value of using the combined sample of histories and accounting for estimation risk, as compared to truncating the sample to produce equal-length histories or ignoring estimation risk by using maximum-likelihood estimates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5918.

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Date of creation: Feb 1997
Date of revision:
Publication status: published as Journal of Financial Economics, Vol. 45 (1997): 285-331.
Handle: RePEc:nbr:nberwo:5918
Note: AP
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  1. Philippe Jorion & William N. Goetzmann, 1998. "Re-Emerging Markets," Yale School of Management Working Papers ysm111, Yale School of Management.
  2. Shmuel Kandel & Robert McCulloch & Robert F. Stambaugh, 1993. "Bayesian Inference and Portfolio Efficiency," NBER Technical Working Papers 0134, National Bureau of Economic Research, Inc.
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  4. Nicholas G. Polson & George C. Tiao (ed.), 1995. "Bayesian Inference," Books, Edward Elgar, volume 0, number 602, April.
  5. Harvey, Campbell R. & Zhou, Guofu, 1990. "Bayesian inference in asset pricing tests," Journal of Financial Economics, Elsevier, vol. 26(2), pages 221-254, August.
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  7. Robert R. Grauer & Nils H. Hakansson, 1993. "On the Use of Mean-Variance and Quadratic Approximations in Implementing Dynamic Investment Strategies: A Comparison of Returns and Investment Policies," Management Science, INFORMS, vol. 39(7), pages 856-871, July.
  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  9. Klein, Roger W. & Bawa, Vijay S., 1977. "The effect of limited information and estimation risk on optimal portfolio diversification," Journal of Financial Economics, Elsevier, vol. 5(1), pages 89-111, August.
  10. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
  11. Klein, Roger W. & Bawa, Vijay S., 1977. "Abstract: The Effect of Limited Information and Estimation Risk on Optimal Portfolio Diversification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 669-669, November.
  12. Shanken, Jay, 1987. "A Bayesian approach to testing portfolio efficiency," Journal of Financial Economics, Elsevier, vol. 19(2), pages 195-215, December.
  13. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
  14. Klein, Roger W. & Bawa, Vijay S., 1976. "The effect of estimation risk on optimal portfolio choice," Journal of Financial Economics, Elsevier, vol. 3(3), pages 215-231, June.
  15. Barry, Christopher B. & Brown, Stephen J., 1985. "Differential Information and Security Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 407-422, December.
  16. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 279-292, September.
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