A novel integration of the Fama–French and Black–Litterman models to enhance portfolio management

Hyungjin Ko, Bumho Son and Jaewook Lee

Journal of International Financial Markets, Institutions and Money, 2024, vol. 91, issue C

Abstract: We propose a novel portfolio model integrating the Fama–French three-factor model into the Black–Litterman framework, enabling efficient investment strategies. The model surpasses traditional benchmarks, significantly increasing alpha, minimizing estimation error, and improving diversification. Performance improvements are shown by a tripled Sharpe ratio and doubled Certainty Equivalent Return compared to standard models. It maintains stability across different parameters and economic climates, leveraging improved weight adjustment to reduce estimation errors and withstand market volatility. It provides a new perspective for portfolio construction, leveraging long-term insights from asset pricing theory with significant implications.

Keywords: Black–Litterman portfolio model; Mean-variance portfolio model; Portfolio management; Asset allocation; Estimation error; Asset pricing; Factor model; Fama–French three-factor model (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:91:y:2024:i:c:s1042443124000155

DOI: 10.1016/j.intfin.2024.101949

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