On the Use of Predictive Distributions in Portfolio Theory

In this paper we consider a multiperiod portfolio problem from a Bayesian point of view. Subjective estimates and/or estimation risk enter the predictive distributions which are the foundations for the determination of optimal portfolios. Predictive distributions are adjusted from period to period. It is shown that this adjustment process exhibits some natural requirements for the behaviour of investors. Contrary to other multiperiod models this approach can be seen to be endogeneously defined since transition probabilities are implied by Bayes formula.