Incorporating Economic Objectives into Bayesian Priors: Portfolio Choice under Parameter Uncertainty

• Main Authors: TU, Jun, ZHOU, Guofu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Portfolio choice; Parameter uncertainty; Bayesian priors; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/4572; https://ink.library.smu.edu.sg/context/lkcsb_research/article/5571/viewcontent/Incorporating_Economic_Objectives_into_Bayesian_Priors__Portfolio.pdf
• Institution: Singapore Management University

This paper proposes a way to allow Bayesian priors to reflect the objectives of an economic problem. That is, we impose priors on the solution to the problem rather than on the primitive parameters whose implied priors can be backed out from the Euler equation. Using monthly returns on the Fama-Fren...