Stable distributions in the Black-Litterman approach to asset allocation

Rosella Giacometti, Marida Bertocchi, Svetlozar T. Rachev, Frank J. Fabozzi

Research output: Contribution to journalArticle

27 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)423-433
Number of pages11
JournalQuantitative Finance
Volume7
Issue number4
DOIs
StatePublished - Aug 2007

Keywords

  • Black-Litterman model
  • Return distributions
  • Risk measures

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