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Sharpe style analysis in the msci sector portfolios: a monte carlo integration approach

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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 (1980)] 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) of [Kloek and van Dijk (1978)] 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 inference 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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Authors and Affiliations

  1. Faculty of Finance, Cass Business School City University, London and Bank of Greece 106 Bunhill Row, EC1Y 8TZ, London, UK

    George A Christodoulakis

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  1. George A Christodoulakis
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Correspondence to George A Christodoulakis.

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The views expressed in this paper are those of the author and should in no part be attributed to the Bank of Greece.

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Christodoulakis, G.A. Sharpe style analysis in the msci sector portfolios: a monte carlo integration approach. Oper Res Int J 2, 123–137 (2002). https://doi.org/10.1007/BF02936324

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