Robust Bayesian allocation

Attilio Meucci

Journal of Investment Strategies

Abstract: ABSTRACT Using the Bayesian posterior distribution of market parameters we define selfadjusting uncertainty regions for the robust mean-variance problem. Under a normal-inverse-Wishart conjugate assumption for the market, the ensuing robust Bayesian mean-variance optimal portfolios are shrunk by the aversion to estimation risk toward the global minimum variance portfolio. After discussing the theory, we test robust Bayesian allocations in a simulation study and in an application to the management of sectors of the S&P 500.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ6:2334860

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