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http://ssrn.com/abstract=938203
 
 

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Multifactor Efficiency and Bayesian Inference


Martijn Cremers


University of Notre Dame

February 2005

Yale ICF Working Paper No. 06-28

Abstract:     
This paper reinvestigates the performance of risk-based multifactor models. In particular, we generalize the Bayesian methodology of Shanken (1987b) and Kandel, McCulloch and Stambaugh (1995) from mean-variance efficiency to the ICAPM notion of multifactor efficiency. This methodology uses informative priors and provides a flexible framework to deal with the severe small sample problems that arise when estimating performance measures. We also introduce and theoretically justify a new inefficiency metric that measures the maximum correlation between the market portfolio and any multifactor efficient portfolio, which is used in conjunction with three other existing inefficiency measures. Finally, we present new empirical evidence that neither the two additional Fama-French (1992) factors nor the momentum factor move the market portfolio robustly closer to being multifactor efficient or robustly decrease pricing errors relative to the CAPM.

Number of Pages in PDF File: 53

Keywords: market measures, multifactor efficiency, market portfolios

JEL Classification: G1

working papers series


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Date posted: October 19, 2006  

Suggested Citation

Cremers, Martijn, Multifactor Efficiency and Bayesian Inference (February 2005). Yale ICF Working Paper No. 06-28. Available at SSRN: http://ssrn.com/abstract=938203

Contact Information

K. J. Martijn Cremers (Contact Author)
University of Notre Dame ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
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