Bayesian Inference and Portfolio Efficiency
Posted: 26 Oct 1999
There are 2 versions of this paper
Bayesian Inference and Portfolio Efficiency
Abstract
A Bayesian approach is used to investigate a sample's information about a portfolio's degree of inefficiency. With standard diffuse priors, posterior distributions for measures of portfolio ineffciency can concentrate well away from values consistent with efficiency, even when the port- folio is exactly efficient in the sample. The data indicate that the NYSE-AMEX market portfolio is rather inefficient in the presence of a riskless asset, although this conclusion is justified only after an analysis using informative priors. Including a riskless asset significantly reduces any sample's ability to produce posterior distributions supporting small degrees of inefficiency.
JEL Classification: G11, G12
Suggested Citation: Suggested Citation