Bayesian Inference in Asset Pricing Tests
44 Pages Posted: 8 Oct 2005
Date Written: June 1990
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: Suggested Citation