The Gibbs Posterior and Parametric Portfolio Choice

Fuente: arXiv
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Autore principale: Lamoureux, Christopher G.
Natura: Preprint
Pubblicazione: 2026
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author Lamoureux, Christopher G.
author_facet Lamoureux, Christopher G.
contents Parametric portfolio policies may experience estimation risk. I develop a generalized Bayesian framework that updates priors, delivering a posterior distribution over characteristic tilts and out-of-sample returns that is the unique belief-updating rule consistent with the investor's utility function, requiring no model for the return generating process. The Gibbs posterior is the closest distribution to the prior in Kullback-Leibler divergence subject to utility maximization. The posterior's scaling parameter $λ$ controls the weight placed on data relative to the prior. I develop a KNEEDLE algorithm to select optimal $λ^*$ in-sample by trading off posterior precision against numerical fragility, eliminating the need for out-of-sample validation. I apply this to U.S. equities (1955-2024), and confirm characteristic-based gains concentrate pre-2000. I find that $λ^*$ varies meaningfully with risk aversion and depends on higher-order moments.
format Preprint
id arxiv_https___arxiv_org_abs_2603_02455
institution arXiv
publishDate 2026
record_format arxiv
spellingShingle The Gibbs Posterior and Parametric Portfolio Choice
Lamoureux, Christopher G.
Portfolio Management
Parametric portfolio policies may experience estimation risk. I develop a generalized Bayesian framework that updates priors, delivering a posterior distribution over characteristic tilts and out-of-sample returns that is the unique belief-updating rule consistent with the investor's utility function, requiring no model for the return generating process. The Gibbs posterior is the closest distribution to the prior in Kullback-Leibler divergence subject to utility maximization. The posterior's scaling parameter $λ$ controls the weight placed on data relative to the prior. I develop a KNEEDLE algorithm to select optimal $λ^*$ in-sample by trading off posterior precision against numerical fragility, eliminating the need for out-of-sample validation. I apply this to U.S. equities (1955-2024), and confirm characteristic-based gains concentrate pre-2000. I find that $λ^*$ varies meaningfully with risk aversion and depends on higher-order moments.
title The Gibbs Posterior and Parametric Portfolio Choice
topic Portfolio Management
url https://arxiv.org/abs/2603.02455