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The Black–Litterman model and views from a reverse optimization procedure: an out-of-sample performance evaluation

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  • Erindi Allaj

    (Epoka University)

Abstract

The Black–Litterman (BL) model has been proposed as a valid solution to the problem of the estimation error in the mean–variance (MV) model. However, very little research has been done in order to empirically test the performance of the model. The paper contributes to the existing literature by empirically examining the out-of-sample performance of the BL model with respect to other asset allocation strategies. As another contribution of the paper, we suggest a novel approach to specify the investor’s views in the BL model. Overall our results suggest that the BL model is a valid asset allocation strategy.

Suggested Citation

  • Erindi Allaj, 2020. "The Black–Litterman model and views from a reverse optimization procedure: an out-of-sample performance evaluation," Computational Management Science, Springer, vol. 17(3), pages 465-492, October.
    • Handle: RePEc:spr:comgts:v:17:y:2020:i:3:d:10.1007_s10287-020-00373-6
    DOI: 10.1007/s10287-020-00373-6
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    Cited by:

    1. Frieder Meyer-Bullerdiek, 2021. "Out-of-sample performance of the Black-Litterman model," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 10(2), pages 1-2.
    2. Eranda c{C}ela & Stephan Hafner & Roland Mestel & Ulrich Pferschy, 2022. "Integrating multiple sources of ordinal information in portfolio optimization," Papers 2211.00420, arXiv.org, revised Jul 2023.

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    More about this item

    Keywords

    Black–Litterman model; Asset allocation strategies; Investor’s views; Out-of-sample performance;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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