Bayesian Methods in Finance provides a detailed overview of the theory of Bayesian methods and explains their real-world applications to financial modeling. While the principles and concepts explained throughout the book can be used in financial modeling and decision making in general, the authors focus on portfolio management and market risk management—since these are the areas in finance where Bayesian methods have had the greatest penetration to date.
Author(s): Svetlozar T. Rachev, John S. J. Hsu, Biliana S. Bagasheva, Frank J. Fabozzi CFA
Series: Frank J. Fabozzi Series
Edition: 1
Publisher: Wiley
Year: 2008
Language: English
Pages: 352
Tags: Финансово-экономические дисциплины;Эконометрика;
Bayesian Methods in Finance......Page 6
Contents......Page 10
Preface......Page 18
About the Authors......Page 20
CHAPTER 1 Introduction......Page 24
A FEW NOTES ON NOTATION......Page 26
OVERVIEW......Page 27
THE LIKELIHOOD FUNCTION......Page 29
THE BAYES’ THEOREM......Page 33
SUMMARY......Page 44
PRIOR INFORMATION......Page 45
POSTERIOR INFERENCE......Page 53
BAYESIAN PREDICTIVE INFERENCE......Page 57
ILLUSTRATION: POSTERIOR TRADE-OFF AND THENORMAL MEAN PARAMETER......Page 58
SUMMARY......Page 60
APPENDIX: DEFINITIONS OF SOME UNIVARIATE AND MULTIVARIATE STATISTICAL DISTRIBUTIONS......Page 61
THE UNIVARIATE LINEAR REGRESSION MODEL......Page 66
THE MULTIVARIATE LINEAR REGRESSION MODEL......Page 79
SUMMARY......Page 83
MONTE CARLO INTEGRATION......Page 84
ALGORITHMS FOR POSTERIOR SIMULATION......Page 86
APPROXIMATION METHODS: LOGISTIC REGRESSION......Page 105
SUMMARY......Page 113
CHAPTER 6 Bayesian Framework for Portfolio Allocation......Page 115
CLASSICAL PORTFOLIO SELECTION......Page 117
BAYESIAN PORTFOLIO SELECTION......Page 124
SHRINKAGE ESTIMATORS......Page 131
UNEQUAL HISTORIES OF RETURNS......Page 133
SUMMARY......Page 139
CHAPTER 7 Prior Beliefs and Asset Pricing Models......Page 141
PRIOR BELIEFS AND ASSET PRICING MODELS......Page 142
MODEL UNCERTAINTY......Page 152
APPENDIX A: NUMERICAL SIMULATION OF THE PREDICTIVE DISTRIBUTION......Page 158
APPENDIX B: LIKELIHOOD FUNCTION OF A CANDIDATE MODEL......Page 161
CHAPTER 8 The Black-Litterman Portfolio Selection Framework......Page 164
PRELIMINARIES......Page 165
COMBINING MARKET EQUILIBRIUM AND INVESTOR VIEWS......Page 169
THE CHOICE OF τ AND ω......Page 170
THE OPTIMAL PORTFOLIO ALLOCATION......Page 171
INCORPORATING TRADING STRATEGIES INTO THE BLACK-LITTERMAN MODEL......Page 176
ACTIVE PORTFOLIO MANAGEMENT AND THE BLACK-LITTERMAN MODEL......Page 177
COVARIANCE MATRIX ESTIMATION......Page 182
SUMMARY......Page 184
CHAPTER 9 Market Efficiency and Return Predictability......Page 185
TESTS OF MEAN-VARIANCE EFFICIENCY......Page 187
INEFFICIENCY MEASURES IN TESTING THE CAPM......Page 190
TESTING THE APT......Page 194
RETURN PREDICTABILITY......Page 198
ILLUSTRATION: PREDICTABILITY AND THE INVESTMENT HORIZON......Page 205
APPENDIX: VECTOR AUTOREGRESSIVE SETUP......Page 206
CHAPTER 10 Volatility Models......Page 208
GARCH MODELS OF VOLATILITY......Page 210
STOCHASTIC VOLATILITY MODELS......Page 217
ILLUSTRATION: FORECASTING VALUE-AT-RISK......Page 221
WHERE DO BAYESIAN METHODS FIT?......Page 223
CHAPTER 11 Bayesian Estimation of ARCH-Type Volatility Models......Page 225
BAYESIAN ESTIMATION OF THE SIMPLE GARCH(1,1) MODEL......Page 226
MARKOV REGIME-SWITCHING GARCH MODELS......Page 237
SUMMARY......Page 248
APPENDIX: GRIDDY GIBBS SAMPLER......Page 249
CHAPTER 12 Bayesian Estimation of Stochastic Volatility Models......Page 252
PRELIMINARIES OF SV MODEL ESTIMATION......Page 253
THE SINGLE-MOVE MCMC ALGORITHM FOR SV MODEL ESTIMATION......Page 255
THE MULTIMOVE MCMC ALGORITHM FOR SV MODEL ESTIMATION......Page 260
JUMP EXTENSION OF THE SIMPLE SV MODEL......Page 264
VOLATILITY FORECASTING AND RETURN PREDICTION......Page 266
APPENDIX: KALMAN FILTERING AND SMOOTHING......Page 267
CHAPTER 13 Advanced Techniques for Bayesian Portfolio Selection......Page 270
DISTRIBUTIONAL RETURN ASSUMPTIONS ALTERNATIVE TO NORMALITY......Page 271
PORTFOLIO SELECTION IN THE SETTING OF NONNORMALITY: PRELIMINARIES......Page 278
MAXIMIZATION OF UTILITY WITH HIGHER MOMENTS......Page 279
EXTENDING THE BLACK-LITTERMAN APPROACH: COPULA OPINION POOLING......Page 286
EXTENDING THE BLACK-LITTERMAN APPROACH: STABLE DISTRIBUTION......Page 293
SUMMARY......Page 295
APPENDIX A: SOME RISK MEASURES EMPLOYED IN PORTFOLIO CONSTRUCTION......Page 296
APPENDIX B: CVAR OPTIMIZATION......Page 299
APPENDIX C: A BRIEF OVERVIEW OF COPULAS......Page 300
CHAPTER 14 Multifactor Equity Risk Models......Page 303
PRELIMINARIES......Page 304
RISK ANALYSIS USING A MULTIFACTOR EQUITY MODEL......Page 306
RETURN SCENARIO GENERATION......Page 310
BAYESIAN METHODS FOR MULTIFACTOR MODELS......Page 315
ILLUSTRATION......Page 317
SUMMARY......Page 318
References......Page 321
Index......Page 334
