Publication: Effect of estimation risk on efficient set : evidence from Thai stock market.
Issued Date
2006
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Language
eng
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Mahidol University
Suggested Citation
Sarayut Nathaphan, Pornchai Chunhachinda, Varumpa Temaismithi (2006). Effect of estimation risk on efficient set : evidence from Thai stock market.. Retrieved from: https://repository.li.mahidol.ac.th/handle/20.500.14594/8776
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Title
Effect of estimation risk on efficient set : evidence from Thai stock market.
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Abstract
This study explores effect of estimation risk on admissible efficient set
and optimal portfolio basing on analysis under Bayesian framework
assumed diffused prior density distribution function. In this study, we
perform a test whether the historical average return can be used to
estimate true parameter or not. We found that historical average return is
an inappropriate estimator. We assume that future asset returns follow
multivariate normal distribution and form three states of analyses.
Assuming true values of parameters are known in the first state, true
variance-covariance of asset return are known but true average return are
not know in the second state, and both true parameters are not known in
the third state. The empirical results based on sectorial index of Stock
Exchange of Thailand (SET) indicate that when estimation risk is taken
into account, the admissible efficient set is not changed. Two conclusions
can be made. The first conclusion is true portfolio return can be
represented by weighted average sample returns. The second conclusion
is that when estimation risk is built into a decision, portfolio risk is
affected by a scale factor. Therefore, Bayesian admissible efficient set
will always lie to the right of the traditional admissible efficient set due to
higher risk from estimation.