Fully Flexible Views in Multivariate Normal Markets
AbstractThe Entropy Pooling approach in Meucci (2008) is a versatile, general framework to process market views in portfolio construction and generalized stress-tests in risk management. Here we present an efficient algorithm to implement Entropy Pooling with fully general views in multivariate normal markets. Then we discuss two applications. First, we use normal Entropy Pooling to estimate a market distribution consistent with the CAPM equilibrium, which improves on the “implied returns” a-la-Black and Litterman (1990) and can be used as the starting point for portfolio construction. Second, we use normal Entropy Pooling to process ranking signals for alpha-generation.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 1311.
Date of creation: 2013
Date of revision:
Portfolio construction; tactical allocation; Entropy Pooling; Kullback-Leibler; Black-Litterman; equilibrium prior; portfolios from sorts; ranking; alpha; signals; factor models; risk management;
Find related papers by JEL classification:
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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