TY - JOUR
T1 - Stable distributions in the Black-Litterman approach to asset allocation
AU - Giacometti, Rosella
AU - Bertocchi, Marida
AU - Rachev, Svetlozar T.
AU - Fabozzi, Frank J.
N1 - Funding Information:
The authors acknowledge the support given by research projects MIUR 60% 2003 ‘Simulation models for complex portfolio allocation’ and MIUR 60% 2004 ‘Models for energy pricing’, by research grants from Division of Mathematical, Life and Physical Sciences, College of Letters and Science, University of California, Santa Barbara and the Deutschen Forschungsgemeinschaft. The authors thank the referees for helpful suggestions.
PY - 2007/8
Y1 - 2007/8
N2 - 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.
AB - 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.
KW - Black-Litterman model
KW - Return distributions
KW - Risk measures
UR - http://www.scopus.com/inward/record.url?scp=34548308618&partnerID=8YFLogxK
U2 - 10.1080/14697680701442731
DO - 10.1080/14697680701442731
M3 - Article
AN - SCOPUS:34548308618
SN - 1469-7688
VL - 7
SP - 423
EP - 433
JO - Quantitative Finance
JF - Quantitative Finance
IS - 4
ER -