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Stable distributions in the Black-Litterman approach to asset allocation

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  • Rosella Giacometti
  • Marida Bertocchi
  • Svetlozar T. Rachev
  • Frank J. Fabozzi

Abstract

The integration of quantitative asset allocation models and the judgment of portfolio managers and analysts (i.e. qualitative view) dates back to a series of papers by Black and Litterman in the early 1990s. In this paper we improve the classical Black-Litterman model by applying more realistic models for asset returns (the normal, the t-student, and the stable distributions) and by using alternative risk measures (dispersion-based risk measures, value at risk, conditional value at risk). Results are reported for monthly data and goodness of the models are tested through a rolling window of fixed size along a fixed horizon. Finally, we find that incorporation of the views of investors into the model provides information as to how the different distributional hypotheses can impact the optimal composition of the portfolio.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 7 (2007)
Issue (Month): 4 ()
Pages: 423-433

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Handle: RePEc:taf:quantf:v:7:y:2007:i:4:p:423-433

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Related research

Keywords: Black-Litterman model; Risk measures; Return distributions;

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Cited by:
  1. Broda, Simon A. & Haas, Markus & Krause, Jochen & Paolella, Marc S. & Steude, Sven C., 2013. "Stable mixture GARCH models," Journal of Econometrics, Elsevier, vol. 172(2), pages 292-306.
  2. Zhang, Zhichao & Chau, Frankie & Xie, Li, 2012. "Strategic Asset Allocation for Central Bank’s Management of Foreign Reserves: A new approach," MPRA Paper 43654, University Library of Munich, Germany.

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