Bayes vs. Resampling: A Rematch

Journal of Investment Management, Vol. 6 No. 1, First Quarter 2008

36 Pages Posted: 26 Apr 2006

See all articles by John Liechty

John Liechty

Pennsylvania State University, University Park

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Merrill W. Liechty

Drexel University - Department of Decision Sciences

Date Written: 2008

Abstract

We replay an investment game that compares the performance of a player using Bayesian methods for determining portfolio weights with a player that uses the Monte Carlo based resampling approach advocated in Michaud (1998). Markowitz and Usmen (2003) showed that the Michaud player always won. However, in the original experiment, the Bayes player was handicapped because the algorithm that was used to evaluate the predictive distribution of the portfolio provided only a rough approximation. We level the playing field by allowing the Bayes player to use a more standard algorithm. Our results sharply contrast with those of the original game. The final part of our paper proposes a new investment game that is much more relevant for the average investor - a one-period ahead asset allocation. For this game, the Bayes player always wins.

Keywords: Bayesian decision problem, parameter uncertainty, optimal portfolios, utility function maximization, resampling

JEL Classification: G11, G12, C11

Suggested Citation

Liechty, John and Harvey, Campbell R. and Liechty, Merrill W., Bayes vs. Resampling: A Rematch (2008). Journal of Investment Management, Vol. 6 No. 1, First Quarter 2008 . Available at SSRN: https://ssrn.com/abstract=898241

John Liechty

Pennsylvania State University, University Park ( email )

University Park
State College, PA 16802
United States

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

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

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Merrill W. Liechty

Drexel University - Department of Decision Sciences ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States
215-895-2459 (Phone)
215-895-2907 (Fax)

HOME PAGE: http://www.pages.drexel.edu/~mwl25/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
938
Abstract Views
3,118
rank
25,164
PlumX Metrics