Bayesian portfolio analysis

Annual Review of Financial Economics

Volumn 2, Issue , 2010, Pages 25-47

  Avramov, Doron ^a,b   Zhou, Guofu ^c  

^a HEBREW UNIVERSITY OF JERUSALEM   (Israel)

^b UNIVERSITY OF MARYLAND   (United States)

^c WASHINGTON UNIVERSITY IN ST LOUIS   (United States)

Author keywords

Informative prior beliefs; Learning; Model uncertainty; Parameter uncertainty; Portfolio choice; Return predictability

Indexed keywords

EID: 78649997511     PISSN: 19411367     EISSN: 19411375     Source Type: Journal    
DOI: 10.1146/annurev-financial-120209-133947     Document Type: Article

References (90)

1. Ait-Sahalia Y, Brandt M. 2001. Variable selection for portfolio choice. J. Finance 56:1297-351 (Pubitemid 33585009)
2. Ang A, Bekaert G, Liu J. 2005. Why stocks may disappoint. J. Financ. Econ. 76:471-508 (Pubitemid 40717206)
3. Avramov D. 2002. Stock return predictability and model uncertainty. J. Financ. Econ. 64:423-58
4. Avramov D. 2004. Stock return predictability and asset pricing models. Rev. Financ. Stud. 17:699-738 (Pubitemid 39159657)
5. Avramov D, Chordia T. 2006a. Asset pricing models and financial market anomalies. Rev. Financ. Stud. 19:1001-40 (Pubitemid 44290388)
6. Avramov D, Chordia T. 2006b. Predicting stock returns. J. Financ. Econ. 82:387-415 (Pubitemid 44469272)
7. Avramov D, Wermers R. 2006. Investing in mutual funds when returns are predictable. J. Financ. Econ. 81:339-77 (Pubitemid 44057761)
8. Avramov D, Cederburg S, Hore S. 2009. Cross-sectional asset pricing puzzles: an equilibrium perspective. Work. Pap., Univ. Maryland
9. Avramov D, Kosowski R, Naik N, Teo M. 2010. Hedge funds, managerial skill, and macroeconomic variables. J. Financ. Econ. Forthcoming
10. Baks K, Metrick A, Wachter J. 2001. Should investors avoid all actively managed mutual funds? A study in Bayesian performance evaluation. J. Finance 56:45-85 (Pubitemid 33581653)
11. Bansal R, Yaron A. 2004. Risks for the long run: a potential resolution of asset pricing puzzles. J. Finance 59:1481-509 (Pubitemid 39137799)
12. Barberis N. 2000. Investing for the long run when returns are predictable. J. Finance 55:225-64
13. Bawa VS, Brown SJ, Klein RW. 1979. Estimation Risk and Optimal Portfolio Choice. Amsterdam: North-Holland
14. Black F, Litterman R. 1992. Global portfolio optimization. Financ. Anal. J. 48:28-43
15. Bossaerts P, Hillion P. 1999. Implementing statistical criteria to select return forecasting models: What do we learn? Rev. Financ. Stud. 12:405-28
16. Brandt M. 2009. Portfolio choice problems. In Handbook of Financial Econometrics, Vol. 1, ed. Y Ait-Sahalia, LP Hansen. Amsterdam: North-Holland
17. Brandt M, Goyal A, Santa-Clara P, Stroud JR. 2005. A simulation approach to dynamic portfolio choice with an application to learning about return predictability. Rev. Financ. Stud. 18:831-71
18. Breeden DT. 1979. An intertemporal asset pricing model with stochastic consumption and investment opportunities. J. Financ. Econ. 7:265-96
19. Brown SJ. 1976. Optimal portfolio choice under uncertainty. PhD thesis. Univ. Chicago
20. Brown SJ. 1978. The portfolio choice problem: comparison of certainty equivalence and optimal Bayes portfolios. Commun. Stat. Simulat. Comput. 7:321-34
21. Busse J, Irvine PJ. 2006. Bayesian alphas and mutual fund persistence. J. Finance 61:2251-88 (Pubitemid 44414097)
22. Campbell JY. 1987. Stock returns and the term structure. J. Financ. Econ. 18:373-99
23. Campbell JY, Shiller RJ. 1988. The dividend ratio model and small sample bias: a Monte Carlo study. Tech. Work. Pap., NBER
24. Chib S, Greenberg E. 1996. Markov Chain Monte Carlo simulation methods in econometrics. Econ. Theory 12:409-31
25. Duffie D, Epstein LG. 1992. Asset pricing with Stochastic differential utility. Rev. Financ. Stud. 5:411-36
26. Epstein LG, Zin SE. 1989. Substitution, risk aversion, and the temporal behavior of consumption growth and asset returns: a theoretical framework. Econometrica 57:937-69
27. Fama EF, French KR. 1989. Business conditions and expected returns on stocks and bonds. J. Financ. Econ. 25:23-49
28. Fama EF, French KR. 1993. Common risk factors in the returns on stocks and bonds. J. Financ. Econ. 33:3-56
29. Ferson WE, Korajczyk RA. 1995. Do arbitrage pricing models explain the predictability of stock returns? J. Bus. 68:309-49
30. Foster FD, Smith T, Whaley RE. 1997. Assessing goodness-of-fit of asset pricing models: the distribution of the maximal R2. J. Finance 52:591-607 (Pubitemid 127344399)
31. Frost PA, Savarino JE. 1986. An empirical Bayes approach to efficient portfolio selection. J. Financ. Quant. Anal. 21:293-305
32. Fung W, Hsieh DA. 2004. Hedge fund benchmarks: a risk-based approach. Financ. Anal. J. 60:65-80 (Pubitemid 39443287)
33. Geczy CC, Stambaugh RF, Levin D. 2005. Investing in socially responsible mutual funds. Work. Pap., SSRN
34. Geweke J. 2001. A note on some limitations of CRRA utility. Econ. Lett. 71(3):341-45
35. Geweke J, Zhou G. 1996. Measuring the pricing error of the arbitrage pricing theory. Rev. Financ. Stud. 9:557-87 (Pubitemid 126408073)
36. Grinold RC, Kahn RN. 1999. Active Portfolio Management. New York: McGraw-Hill
37. Grossman SJ, Shiller RJ. 1981. The determinants of the variability of stock market prices. Am. Econ. Rev. 71:222-27
38. Han Y. 2006. Asset allocation with a high dimensional latent factor stochastic volatility model. Rev. Financ. Stud. 19:237-71 (Pubitemid 43007160)
39. Harvey CR, Liechty JC, Liechty MW, Müller P. 2004. Portfolio selection with higher moments. Work. Pap., Duke Univ.
40. Hastings WK. 1970. Monte Carlo sampling methods using Markov chains and their applications. Biometrika 57:97-109
41. He G, Litterman R. 1999. The intuition behind Black-Litterman model portfolios. Work. Pap., Goldman Sachs Quant. Resour. Group
42. Hong Y, Tu J, Zhou G. 2007. Asymmetries in stock returns: statistical tests and economic evaluation. Rev. Financ. Stud. 20:1547-81
43. Jobson JD, Korkie B, Ratti V. 1979. Improved estimation for Markowitz portfolios using James-Stein type estimators. Proc. Am. Stat. Assoc. Bus. Econ. Stat. Sect. 41:279-84
44. Jones C, Shanken J. 2005. Mutual fund performance and learning across funds. J. Financ. Econ. 78:507-52 (Pubitemid 41662895)
45. Jorion P. 1986. Bayes-Stein estimation for portfolio analysis. J. Financ. Quant. Anal. 21:279-92
46. Kacperczyk M. 2008. Asset allocation under distribution uncertainty. Work. Pap., Univ. Br. Columbia
47. Kan R, Zhou G. 2007. Optimal portfolio choice with parameter uncertainty. J. Financ. Quant. Anal. 42:621-56
48. Kandel S, McCulloch R, Stambaugh RF. 1995. Bayesian inference and portfolio efficiency. Rev. Financ. Stud. 9(1):1-53
49. Kandel S, Stambaugh RF. 1996. On the predictability of stock returns: an asset-allocation perspective. J. Finance 51:385-424
50. Keim DB, Stambaugh RF. 1986. Predicting returns in bond and stock markets. J. Financ. Econ. 12:357-90
51. Kirby C. 1998. The restrictions on predictability implied by rational asset pricing models. Rev. Financ. Stud. 11:343-82
52. Klein RW, Bawa VS. 1976. The effect of estimation risk on optimal portfolio choice. J. Financ. Econ. 3:215-31
53. Klein RW, Brown SJ. 1984. Model selection when there is 'minimal' prior information. Econometrica 52:1291-312
54. Lamoureux C, Zhou G. 1996. Temporary components of stock returns: What do the data tell us? Rev. Financ. Stud. 9:1033-59 (Pubitemid 126318307)
55. Lehmann EL, Casella G. 1998. Theory of Point Estimation. New York: Springer-Verlag
56. Lettau M, Ludvigson S. 2001. Consumption, aggregate wealth, and expected stock returns. J. Finance 56:815-49 (Pubitemid 33581666)
57. Lintner J. 1965. Security prices, risk and maximal gains from diversification. J. Finance 20:587-615
58. Litterman B. 2003. Modern Investment Management: An Equilibrium Approach. New York: Wiley
59. Lucas RE Jr. 1978. Asset prices in an exchange economy. Econometrica 46:1429-45
60. MacKinlay AC, Pástor L. 2000. Asset pricing models: implications for expected returns and portfolio selection. Rev. Financ. Stud. 13:883-916 (Pubitemid 33233247)
61. Markowitz HM. 1952. Mean-variance analysis in portfolio choice and capital markets. J. Finance 7:77-91
62. McCulloch R, Rossi PE. 1990. Posterior, predictive, and utility-based approaches to testing the arbitrage pricing theory. J. Financ. Econ. 28 (1-2): 7-38
63. Merton R. 1969. Lifetime portfolio selection under uncertainty: the continuous time case. Rev. Econ. Stat. 51:247-57
64. Merton RC. 1973. An intertemporal capital asset pricing model. Econometrica 41:867-87
65. Metropolis N, Rosenbluth AW, Rosenbluth MN, Teller AH. 1953. Equations of state calculations by fast computing machines. J. Chem. Phys. 21:1087-92
66. Meucci A. 2005. Risk and Asset Allocation. New York: Springer-Verlag
67. Nardari F, Scruggs J. 2007. Bayesian analysis of linear factor models with latent factors, multivariate stochastic volatility, and APT pricing restrictions. J. Financ. Quant. Anal. 42:857-92
68. Pástor L. 2000. Portfolio selection and asset pricing models. J. Financ. 55:179-223
69. Pástor L, Stambaugh RF. 2000. Comparing asset pricing models: an investment perspective. J. Financ. Econ. 56:335-81
70. Pástor L, Stambaugh RF. 2002a. Mutual fund performance and seemingly unrelated assets. J. Financ. Econ. 63:315-49
71. Pástor L, Stambaugh RF. 2002b. Investing in equity mutual funds. J. Financ. Econ. 63:351-80
72. Pástor L, Stambaugh RF. 2009a. Predictive systems: living with imperfect predictors. J. Finance 64:1583-628
73. Pástor L, Stambaugh RF. 2009b. Are stocks really less volatile in the long run? Work. Pap., Univ. Chicago/Univ. Penn.
74. Pástor L, Veronesi P. 2009. Learning in financial markets. Annu. Rev. Financ. Econ. 1:361-81
75. Ross S. 1976. The arbitrage theory of capital asset pricing. J. Econ. Theory 13:341-60
76. Rubinstein M. 1976. The valuation of uncertain income streams and the pricing of options. Bell J. Econ. 7:407-25
77. Samuelson PA. 1969. Lifetime portfolio selection by dynamic stochastic programming. Rev. Econ. Stat. 51:239-46
78. Sharpe WF. 1964. Capital asset prices: a theory of market equilibrium under conditions of risk. J. Finance 19:425-42
79. Stambaugh RF. 1997. Analyzing investments whose histories differ in length. J. Financ. Econ. 45:285-331 (Pubitemid 127169474)
80. Stambaugh RF. 1999. Predictive regressions. J. Financ. Econ. 54:375-421
81. Tu J. 2010. Is regime switching in stock returns important in portfolio decisions? Manag. Sci. 56:1198-1215
82. Tu J, Zhou G. 2004. Data-generating process uncertainty: What difference does it make in portfolio decisions? J. Financ. Econ. 72:385-421 (Pubitemid 38461977)
83. Tu J, Zhou G. 2010. Incorporating economic objectives into Bayesian priors: portfolio choice under parameter uncertainty. J. Financ. Quant. Anal. doi:10.1017/S0022109010000335 (E-pub ahead of print)
84. Wachter JA, Warusawitharana M. 2009. Predictable returns and asset allocation: Should a skeptical investor time the market? J. Econom. 148:162-78
85. Winkler RL. 1973. Bayesian models for forecasting future security prices. J. Financ. Quant. Anal. 8:387-405
86. Winkler RL, Barry CB. 1975. A Bayesian model for portfolio selection and revision. J. Finance 30:179-92
87. Zellner A. 1971. An Introduction to Bayesian Inference in Econometrics. New York: Wiley
88. Zellner A, Chetty VK. 1965. Prediction and decision problems in regression models from the Bayesian point of view. J. Am. Stat. Assoc. 60:608-16
89. Zhou G. 2009. Beyond Black-Litterman: letting the data speak. J. Portfol. Manage. 36:36-45
90. Zhou G, Zhu Y. 2009. A long-run risks model with long-and short-run volatilities: explaining predictability and volatility risk premium. Work. Pap., SSRN