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An application of the Black–Litterman model with EGARCH-M-derived views for international portfolio management

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  • Steven Beach

    ()

  • Alexei Orlov

Abstract

This paper provides an application of the Black–Litterman methodology to portfolio management in a global setting. The novel feature of this paper relative to the extant literature on Black–Litterman methodology is that we use GARCH-derived views as an input into the Black–Litterman model. The returns on our portfolio surpass those of portfolios that rely on market equilibrium weights or Markowitz-optimal allocations. We thereby illustrate how the Black–Litterman model can be put to work in designing global investment strategies. Copyright Swiss Society for Financial Market Research 2007

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File URL: http://hdl.handle.net/10.1007/s11408-007-0046-6
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Bibliographic Info

Article provided by Springer in its journal Financial Markets and Portfolio Management.

Volume (Year): 21 (2007)
Issue (Month): 2 (June)
Pages: 147-166

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Handle: RePEc:kap:fmktpm:v:21:y:2007:i:2:p:147-166

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Web page: http://www.springerlink.com/link.asp?id=119763

Related research

Keywords: Black–Litterman; GARCH; Global portfolio management; G11; G15;

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References

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  1. Manuel Ammann & Michael Verhofen, 2006. "The Effect of Market Regimes on Style Allocation," Financial Markets and Portfolio Management, Springer, vol. 20(3), pages 309-337, September.
  2. Black, Fischer, 1990. " Equilibrium Exchange Rate Hedging," Journal of Finance, American Finance Association, vol. 45(3), pages 899-907, July.
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  4. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  5. Campbell, John Y. & Hentschel, Ludger, 1992. "No news is good news *1: An asymmetric model of changing volatility in stock returns," Journal of Financial Economics, Elsevier, vol. 31(3), pages 281-318, June.
  6. Robert Engle, 2001. "GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 157-168, Fall.
  7. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  8. Harvey, Campbell R, 1995. "The Risk Exposure of Emerging Equity Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 19-50, January.
  9. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
  10. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  11. Wayne E. Ferson & Campbell R. Harvey, 1994. "Sources of Risk and Expected Returns in Global Equity Markets," NBER Working Papers 4622, National Bureau of Economic Research, Inc.
  12. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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Cited by:
  1. Becker, Franziska & Gürtler, Marc, 2008. "Quantitative forecast model for the application of the Black-Litterman approach," Working Papers IF27V2, Technische Universität Braunschweig, Institute of Finance.

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