47 Pages Posted: 29 Dec 2006
Date Written: May 1993
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 inefficiency can concentrate well away from values consistent with efficiency, even when the portfolio 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.
Suggested Citation: Suggested Citation
Kandel (deceased), Shmuel and McCulloch, Robert E. and Stambaugh, Robert F., Bayesian Inference and Portfolio Efficiency (May 1993). NBER Working Paper No. t0134. Available at SSRN: https://ssrn.com/abstract=573125