Sharpe style analysis in the Morgan Stanley Capital International sector portfolios: A Monte Carlo Integration approach

Sharpe style analysis in the Morgan Stanley Capital International sector portfolios: A Monte Carlo Integration approach

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Article ID: iaor20041477
Country: Greece
Volume: 2
Issue: 2
Start Page Number: 123
End Page Number: 137
Publication Date: May 2002
Journal: Operational Research - An International Journal
Authors:
Keywords: portfolio analysis
Abstract:

We examine a decision-theoretic Bayesian framework for the estimation of Sharpe Style portfolio weights of the MSCI sector returns. Following van Dijk and Kloek an appropriately defined prior density of style weights can incorporate non-negativity and other constraints. We use factor-mimicking portfolios as proxies to global style factors such as Value, Growth, Debt and Size. Our computational approach is based on Monte Carlo Integration (MCI) for the estimation of the posterior moments and distribution of portfolio weights. MCI provides a number of advantages, such as a flexible choice of prior distributions, improved numerical accuracy of the estimated parameters, the use of inequality restrictions in prior distributions and exact interence procedures. Our empirical findings suggest that, contrary to existing evidence, style factors do explain the MSCI sector portfolio returns for the particular sample period. Further, non-negativity constraints on portfolio weights were found to be binding in all cases.

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