Does a Bayesian Approach Generate Robust Forecasts? Evidence from Applications in Portfolio Investment Decisions

8 Pages Posted: 17 Dec 2008

See all articles by Chih-Ling Tsai

Chih-Ling Tsai

University of California, Davis - Graduate School of Management

Hansheng Wang

Peking University - Guanghua School of Management

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

Date Written: December 15, 2008

Abstract

We employ a statistical criterion (out-of-sample hit rate) and a financial market measure (portfolio performance) to compare the forecasting accuracy of three model selection approaches: Bayesian information criterion (BIC), model averaging, and model mixing. While the more recent approaches of model averaging and model mixing surpass the Bayesian information criterion in their out-of-sample hit rates, the predicted portfolios from these new approaches do not significantly outperform the portfolio obtained via the BIC subset selection method.

Keywords: model selection, BIC, model averaging, model mixing, stock predictability, financial markets

JEL Classification: E44, C11

Suggested Citation

Tsai, Chih-Ling and Wang, Hansheng and Zhu, Ning, Does a Bayesian Approach Generate Robust Forecasts? Evidence from Applications in Portfolio Investment Decisions (December 15, 2008). Available at SSRN: https://ssrn.com/abstract=1316619 or http://dx.doi.org/10.2139/ssrn.1316619

Chih-Ling Tsai

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Hansheng Wang (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://hansheng.gsm.pku.edu.cn

Ning Zhu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )

135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://pantheon.yale.edu/~nz26/

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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