Bayesian inference of the multi-period optimal portfolio for an exponential utility

DOI10.1016/J.JMVA.2019.104544zbMATH Open1435.62104arXiv1705.06533OpenAlexW2973143466WikidataQ115570108 ScholiaQ115570108MaRDI QIDQ2293380FDOQ2293380

Authors: David Bauder, Taras Bodnar, Nestor Parolya, Wolfgang Schmid 

Publication date: 5 February 2020

Published in: Journal of Multivariate Analysis (Search for Journal in Brave)

Abstract: We consider the estimation of the multi-period optimal portfolio obtained by maximizing an exponential utility. Employing Jeffreys' non-informative prior and the conjugate informative prior, we derive stochastic representations for the optimal portfolio weights at each time point of portfolio reallocation. This provides a direct access not only to the posterior distribution of the portfolio weights but also to their point estimates together with uncertainties and their asymptotic distributions. Furthermore, we present the posterior predictive distribution for the investor's wealth at each time point of the investment period in terms of a stochastic representation for the future wealth realization. This in turn makes it possible to use quantile-based risk measures or to calculate the probability of default. We apply the suggested Bayesian approach to assess the uncertainty in the multi-period optimal portfolio by considering assets from the FTSE 100 in the weeks after the British referendum to leave the European Union. The behaviour of the novel portfolio estimation method in a precarious market situation is illustrated by calculating the predictive wealth, the risk associated with the holding portfolio, and the default probability in each period.

Full work available at URL: https://arxiv.org/abs/1705.06533

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zbMATH Keywords

Bayesian estimationstochastic representationcredible setsposterior predictive distributionmulti-period optimal portfolio

Mathematics Subject Classification ID

Exact distribution theory in statistics (62E15) Bayesian inference (62F15) Applications of statistics to economics (62P20) Estimation in multivariate analysis (62H12) Microeconomic theory (price theory and economic markets) (91B24)

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Cited In (8)

• Bayesian inference for the tangent portfolio
• BAYESIAN INTERPRETATION OF CONTINUOUS-TIME UNIVERSAL PORTFOLIOS(Special Issue on Theory, Methodology and Applications in Financial Engneering)
• Bayesian filtering for multi-period mean-variance portfolio selection
• Bayesian portfolio selection using VaR and CVaR
• Bayesian mean-variance analysis: optimal portfolio selection under parameter uncertainty
• Optimal asset allocation with multivariate Bayesian dynamic linear models
• On the exact solution of the multi-period portfolio choice problem for an exponential utility under return predictability
• Title not available (Why is that?)

Uses Software

• BayesDA

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