Data-Generating Process Uncertainty: What Difference Does It Make in Portfolio Decisions

• Main Authors: Tu, Jun, Zhou, Guofu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Asset pricing tests: Investments; Data generating process; t distribution; Bayesian analysis; Business
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2692; https://doi.org/10.1016/j.jfineco.2003.05.003
• Institution: Singapore Management University

As the usual normality assumption is firmly rejected by the data, investors encounter a data-generating process (DGP) uncertainty in making investment decisions. In this paper, we propose a novel way to incorporate uncertainty about the DGP into portfolio analysis. We find that accounting for fat ta...