Bayesian Imputation with Optimal Look-Ahead-Bias and Variance Tradeoff
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Missing time-series data is a prevalent problem in finance. Imputation methods for time-series data are usually applied to the full panel data with the purpose of training a model for a downstream out-of-sample task. For example, the imputation of missing returns may be applied prior to estimating a portfolio optimization model. However, this practice can result in a look-ahead-bias in the future performance of the downstream task. There is an inherent trade-off between the look-ahead-bias of using the full data set for imputation and the larger variance in the imputation from using only the training data. By connecting layers of information revealed in time, we propose a Bayesian consensus posterior that fuses an arbitrary number of posteriors to optimally control the variance and look-ahead-bias trade-off in the imputation. We derive tractable two-step optimization procedures for finding the optimal consensus posterior, with Kullback-Leibler divergence and Wasserstein distance as the measure of dissimilarity between posterior distributions. We demonstrate in simulations and an empirical study the benefit of our imputation mechanism for portfolio optimization with missing returns.
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