The dynamic Black-Litterman approach to asset allocation

Richard Harris, Evarist Stoja () and Linzhi Tan ()
Additional contact information
Evarist Stoja: School of Economics, Finance and Management, University of Bristol
Linzhi Tan: Division of Accounting and Finance, Nottingham Business School, Nottingham Trent University.

No 596, Bank of England working papers from Bank of England

Abstract: We generalise the Black-Litterman (BL) portfolio management framework to incorporate time-variation in the conditional distribution of returns in the asset allocation process. We evaluate the performance of the dynamic BL model using both standard performance ratios as well as other measures that are designed to capture tail risk in the presence of non-normally distributed asset returns. We find that dynamic BL model outperforms a range of different benchmarks. Moreover, we show that the choice of volatility model has a considerable impact on the performance of the dynamic BL model.

Keywords: Black-Litterman model; multivariate conditional volatility; portfolio optimization; non-normality; tail risk (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-04-22
New Economics Papers: this item is included in nep-pke and nep-rmg
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Related works:
Journal Article: The dynamic Black–Litterman approach to asset allocation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0596

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