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 language | English |
|---|---|
| Title of host publication | Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning |
| Publisher | World Scientific Publishing |
| Chapter | 93 |
| Pages | 3241-3261 |
| Number of pages | 21 |
| Volume | 3 |
| ISBN (Electronic) | 9789811202407, 9789811202438 |
| ISBN (Print) | 9789811202384 |
| DOIs | |
| Publication status | Published - 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)
- General Business,Management and Accounting