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Bayesian Portfolio Mean-Variance Efficiency Test with Sampling Error of Sharpe Ratio

In: Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes

Author

Listed:
  • Lie-Jane Kao
  • Huei Ching Soo
  • Cheng Few Lee

Abstract

This study proposes a Bayesian test for a test portfolio p’s mean-variance efficiency that takes into account the sampling errors associated with the ex-post Sharpe ratio ŜR of the test portfolio p. The test is based on the Bayes factor that compares the joint likelihoods under the null hypothesis H0 and the alternative H1. Using historical monthly return data of ten industrial portfolios and a test portfolio, namely, the CRSP value-weighted index, from January 1941 to December 1973 and January 1980 to December 2012, the power function of the proposed Bayesian test is compared to the conditional multivariate F test by Gibbons et al. (1989) and the Bayesian test by Shanken (1987). In an independent simulation study, the performance of the proposed Bayesian test is also demonstrated.

Suggested Citation

  • Lie-Jane Kao & Huei Ching Soo & Cheng Few Lee, 2024. "Bayesian Portfolio Mean-Variance Efficiency Test with Sampling Error of Sharpe Ratio," World Scientific Book Chapters, in: Cheng Few Lee & Alice C Lee & John C Lee (ed.), Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes, chapter 93, pages 3077-3098, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811269943_0093
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    Keywords

    Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G3 - Financial Economics - - Corporate Finance and Governance

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