Bayesian Portfolio Mean-Variance Efficiency Test with Sampling Error of Sharpe Ratio

Lie-Jane Kao, Huei Ching Soo, Cheng Few Lee

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

This study proposes a Bayesian test for a test portfolio p’s mean-variance efficiency that takes into account the sampling errors associated with the ex-post Sharpe ratio ŜR of the test portfolio p. The test is based on the Bayes factor that compares the joint likelihoods under the null hypothesis H0 and the alternative H1. Using historical monthly return data of ten industrial portfolios and a test portfolio, namely, the CRSP value-weighted index, from January 1941 to December 1973 and January 1980 to December 2012, the power function of the proposed Bayesian test is compared to the conditional multivariate F test by Gibbons et al. (1989) and the Bayesian test by Shanken (1987). In an independent simulation study, the performance of the proposed Bayesian test is also demonstrated.
Original languageEnglish
Title of host publicationHandbook of Investment Analysis, Portfolio Management, and Financial Derivatives
PublisherWorld Scientific
Pages3077-3098
Number of pages22
ISBN (Electronic)9789811269950
ISBN (Print)9789811269936
DOIs
Publication statusPublished - 2024

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