Bayesian Inference and Portfolio Efficiency

Posted: 26 Oct 1999

See all articles by Shmuel Kandel (deceased)

Shmuel Kandel (deceased)

Deceased

Robert E. McCulloch

University of Chicago - Booth School of Business

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

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

Kandel (deceased), Shmuel and McCulloch, Robert E. and Stambaugh, Robert F., Bayesian Inference and Portfolio Efficiency. REVIEW OF FINANCIAL STUDIES, Volume 8 Issue 1. Available at SSRN: https://ssrn.com/abstract=5606

Robert E. McCulloch

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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