Journal of Financial and Quantitative Analysis Vol. 11 No. 2 1976
Nonstationarity and Portfolio Choice
Abstract
In this paper some effects of nonstationary parameters upon inferences and decisions in portfolio analysis are investigated. A Bayesian inferential model with nonstationary parameters is presented and is applied to the problem of portfolio choice. For this model, nonstationarity 1) implies greater uncertainty about future returns; 2) implies that in forecasting future returns, recent returns should receive more weight than not-so-recent returns; 3) restricts the amount of information that can be obtained about future values of the parameters of interest; 4) shifts investment among risky securities and from risky securities to risk-free securities; and 5) yields optimal portfolios with smaller expected returns than corresponding optimal portfolios in the stationary case.
- DOI
- 10.2307/2979051
- Volume
- 11
- Issue
- 2
- Pages
- 217
- Sources
- openalex crossref