Abstract
We generalise the Black-Litterman (BL) portfolio management framework to incorporate time-variation in the conditional distribution of returns in the asset allocation process. We evaluate the performance of the dynamic BL model using both standard performance ratios as well as other measures that are designed to capture tail risk in the presence of non-normally distributed asset returns. We find that dynamic BL model outperforms a range of different benchmarks. Moreover, we show that the choice of volatility model has a considerable impact on the performance of the dynamic BL model.
Original language | English |
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Pages (from-to) | 1085–1096 |
Number of pages | 12 |
Journal | European Journal of Operational Research |
Volume | 259 |
Issue number | 3 |
Early online date | 20 Dec 2016 |
DOIs | |
Publication status | Published - 16 Jun 2017 |
Keywords
- Black-Litterman model
- Multivariate conditional volatility
- Portfolio optimization
- Non-normality
- Tail risk
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Professor Evarist Stoja
- School of Accounting and Finance - Business School - Professor of Finance
Person: Academic