Multivariate GARCH models and Black-Litterman approach for tracking error constrained portfolios: an empirical analysis

Giulio Palomba ()

No 267, Working Papers from Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali

Abstract: In a typical tactical asset allocation set up managers generally make their investment decisions by inserting private information in an optimisation mechanism used to beat a benchmark portfolio; in this context the sole approach a' la Markowitz (1959) does not use all the available information about expected excess return and especially it does not take two main factors into account: first, asset returns often show changes in volatility, and second, the manager's private information plays no role in the optimisation process. This paper provides an empirical work for large scale tactical asset allocation strategy in which a multivariate GARCH estimation is used in portfolio optimisation, given a tracking error constraint (Jorion, 2003). Moreover, the use of Black and Litterman (1991, 1992) approach allows for the possibility to tactically manage the selected portfolio through a very short time, combining informations taken from the time varying volatility model with some personal "view" about asset returns.

Keywords: Black and Litterman approach; multivariate GARCH models; tactical asset allocation (search for similar items in EconPapers)
JEL-codes: C32 C53 G11 (search for similar items in EconPapers)
Pages: 33
Date: 2006-09
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Multivariate GARCH models and the Black-Litterman approach for tracking error constrained portfolios: an empirical analysis (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:anc:wpaper:267

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