Bayesian portfolio mean-variance efficiency test with sharpe ratio’s sampling error

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, respectively. Using historical monthly return data of 10 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, Ross and Shanken (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 Financial Econometrics, Mathematics, Statistics, and Machine Learning
PublisherWorld Scientific Publishing
Chapter93
Pages3241-3261
Number of pages21
Volume3
ISBN (Electronic)9789811202407, 9789811202438
ISBN (Print)9789811202384
DOIs
Publication statusPublished - 2020

Keywords

  • Bayes factor
  • Bayesian test
  • Conditional multivariate f-test
  • CRSP value-weighted index
  • Ex post sharpe ratio
  • Mean-variance efficiency

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)

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