Article1982

A Bayesian Robust Detection of Shift in the Risk Structure of Stock Market Returns

90 citations0/0 files storedJournal of the American Statistical Association

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Statistical Distribution Estimation and Applications

Abstract

In this article we provide a statistical procedure for the analysis of stock market prices that is robust toward departures from the normal distribution assumption and that can detect and evaluate a shift of parameters at an unknown time point. The method is an adaptation of a Bayesian inferential procedure developed by Box and Tiao that allows data to deviate moderately from the normal distribution model. It is applied to a set of U.S. stock market prices for 1971–1974. In addition to the detection of shift in distribution parameters, the procedure is also applied to the examination of shift of the “beta coefficients” that represent the degree of undiversifiable (systematic) risk of individual securities. Implications of the empirical findings for financial theories and their applications are sketched.

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1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1965The Behavior of Stock-Market Prices 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1966Equilibrium in a Capital Asset Market 1963The Variation of Certain Speculative Prices 1997The variation of certain speculative prices 1977A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory

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