The Dynamic Black-Litterman Approach to Asset Allocation

Research output: Contribution to journalArticle (Academic Journal)peer-review

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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 languageEnglish
Pages (from-to)1085–1096
Number of pages12
JournalEuropean Journal of Operational Research
Volume259
Issue number3
Early online date20 Dec 2016
DOIs
Publication statusPublished - 16 Jun 2017

Keywords

  • Black-Litterman model
  • Multivariate conditional volatility
  • Portfolio optimization
  • Non-normality
  • Tail risk

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