Bayesian Inference in Asset Pricing Tests

44 Pages Posted: 8 Oct 2005

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Date Written: June 1990

Abstract

We test the mean-variance efficiency of a given portfolio with a Bayesian framework. Our test is more direct than Shanken's (1987), because we impose a prior on all the parameters of the multivariate regression model. The approach is also easily adapted to other problems. We use Monte Carlo numerical integration to accurately evaluate 90-dimensional integrals. Posterior-odds ratios are calculated for 12 industry portfolios from 1926-1987. The sensitivity of the inferences to the prior is investigated using three distributions. The probability that the given portfolio is mean-variance efficient is small for a range of plausible priors. This is the working paper version of our 1990 Journal of Financial Economics article.

Keywords: Asset pricing, CAPM, Bayesian finance, CAPM tests, market efficiency

JEL Classification: G12, G11, G14

Suggested Citation

Harvey, Campbell R. and Zhou, Guofu, Bayesian Inference in Asset Pricing Tests (June 1990). Available at SSRN: https://ssrn.com/abstract=812929 or http://dx.doi.org/10.2139/ssrn.812929

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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