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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

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  • 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

Suggested Citation

  • Steven Beach & Alexei Orlov, 2007. "An application of the Black–Litterman model with EGARCH-M-derived views for international portfolio management," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(2), pages 147-166, June.
  • Handle: RePEc:kap:fmktpm:v:21:y:2007:i:2:p:147-166
    DOI: 10.1007/s11408-007-0046-6
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    References listed on IDEAS

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    1. 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.
    2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    3. 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.
    4. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
    5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    6. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    7. 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.
    8. Black, Fischer, 1990. " Equilibrium Exchange Rate Hedging," Journal of Finance, American Finance Association, vol. 45(3), pages 899-907, July.
    9. Ferson, Wayne E. & Harvey, Campbell R., 1994. "Sources of risk and expected returns in global equity markets," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 775-803, September.
    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. Manuel Ammann & Michael Verhofen, 2006. "The Effect of Market Regimes on Style Allocation," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(3), pages 309-337, September.
    12. 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.
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    Citations

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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.
    2. Harris, Richard D.F. & Stoja, Evarist & Tan, Linzhi, 2017. "The dynamic Black–Litterman approach to asset allocation," European Journal of Operational Research, Elsevier, vol. 259(3), pages 1085-1096.
    3. repec:eee:empfin:v:43:y:2017:i:c:p:159-184 is not listed on IDEAS
    4. Erindi Allaj, 2013. "The Black–Litterman model: a consistent estimation of the parameter tau," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(2), pages 217-251, June.

    More about this item

    Keywords

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

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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