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Black–Litterman asset allocation under hidden truncation distribution

Author

Listed:
  • Jungjun Park

    (St. Lawrence University)

  • Andrew L. Nguyen

    (California State University Fullerton)

Abstract

In this paper, we study the Black–Litterman (BL) asset allocation model (Black and Litterman in Asset Allocation: combining investor views with market equilibrium, Goldman Sachs Fixed Income Research, 1990) under the hidden truncation skew-normal distribution (Arnold and Beaver in Sankhya: Indian J Stat Ser A, 2000). We specifically demonstrate that when returns are modeled using this skew-normal distribution, the posterior returns, after incorporating views, also follow a skew-normal distribution. By applying Simaan’s three-moment risk model (Simaan in Manag Sci 5:578–587, 1993), we further illustrate how an optimal portfolio can be constructed under the assumption of skew-normal returns. To provide practical insights, we present numerical illustrations based on a sample of selected stock price times series.

Suggested Citation

  • Jungjun Park & Andrew L. Nguyen, 2025. "Black–Litterman asset allocation under hidden truncation distribution," Mathematics and Financial Economics, Springer, volume 19, number 7, December.
    • Handle: RePEc:spr:mathfi:v:19:y:2025:i:2:d:10.1007_s11579-025-00387-1
    DOI: 10.1007/s11579-025-00387-1
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    References listed on IDEAS

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    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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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