Bayes-Stein Estimation for Portfolio Analysis

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Fitch Ratings Jobs

[ Worldwide]

Post Your Résumé
For Recruiters

Featured Book

Paris-Princeton Lectures on Mathematical Finance 2004 Finance 2004
by Rene A. Carmona, Ivar Ekeland, Arturo Kohatsu-Higa, Jean-Michel Lasry, Pierre-Louis Lions, Huyen Pham, Erik Taflin, Springer, (October 1, 2007), Paperback, 248 pages

Training Discounted for DefaultRisk.com visitors only:

The Mathematics of Credit Derivatives: The Essential Credit Modelling and Pricing Companion
by Philipp J. Schönbucher,
WBS Training, August 2003, DVD / Interactive CD-ROM

Sponsor:
Shop at Amazon.com and support DefaultRisk.com

Jorion, Philippe, "Bayes-Stein Estimation for Portfolio Analysis", Journal of Financial and Quantitative Analysis, Vol. 21, No. 3, (September 1986), pp. 279-292.

Abstract: In portfolio analysis, uncertainty about parameter values leads to suboptimal portfolio choices. The resulting loss in the investor's utility is a function of the particular estimator chosen for expected returns. So, this is a problem of simultaneous estimation of normal means under a well-specified loss function. In this situation, as Stein has shown, the classical sample mean is inadmissible. This paper presents a simple empirical Bayes estimator that should outperform the simple mean in the context of a portfolio. Simulation analysis shows that these Bayes-Stein estimators provide significant gains in portfolio selection problems.

Books Referenced in this Paper: (what is this?)