Bayesian Methods in Finance

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.

Preface xv About the Authors xvii CHAPTER 1 Introduction 1 CHAPTER 2 The Bayesian Paradigm 6 CHAPTER 3 Prior and Posterior Information, Predictive Inference 22 CHAPTER 4 Bayesian Linear Regression Model 43 CHAPTER 5 Bayesian Numerical Computation 61 CHAPTER 6 Bayesian Framework For Portfolio Allocation 92 CHAPTER 7 Prior Beliefs and Asset Pricing Models 118 CHAPTER 8 The Black-Litterman Portfolio Selection Framework 141 CHAPTER 9 Market Efficiency and Return Predictability 162 CHAPTER 10 Volatility Models 185 CHAPTER 11 Bayesian Estimation of ARCH-Type Volatility Models 202 CHAPTER 12 Bayesian Estimation of Stochastic Volatility Models 229 CHAPTER 13 Advanced Techniques for Bayesian Portfolio Selection 247 CHAPTER 14 Multifactor Equity Risk Models 280 References 298 Index 311