Nonstationarity and Portfolio Choice

Barry CB & Winkler RL (1973). Nonstationarity and Portfolio Choice. IIASA Research Report. IIASA, Laxenburg, Austria: RR-73-012

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Abstract

In this paper some effects of nonstationary parameters upon inferences and decisions in portfolio analysis are investigated. A Bayesian inferential model with nonstationary parameters is presented and is applied to the problem of portfolio choice. For this model, nonstationarity 1) implies greater uncertainty about future returns; 2) implies that in forecasting future returns, recent returns should receive more weight than not-so-recent returns; 3) restricts the amount of information that can be obtained about future values of the parameters of interest; 4) shifts investment among risky securities and from risky securities to risk-free securities; and 5) yields optimal portfolios with smaller expected returns than corresponding optimal portfolios in the stationary case.

Item Type: Monograph (IIASA Research Report)
Research Programs: System and Decision Sciences - Core (SDS)
Depositing User: IIASA Import
Date Deposited: 15 Jan 2016 01:40
Last Modified: 21 Jul 2016 18:59
URI: http://pure.iiasa.ac.at/13

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