A BL-MF fusion model for portfolio optimization: Incorporating the Black–Litterman solution into multi-factor model

Jin Yuan, Liwei Jin and Feng Lan

Finance Research Letters, 2025, vol. 80, issue C

Abstract: We study a Black–Litterman and multi-factor (BL-MF) fusion model that integrates equilibrium expected returns and investor views information from the Black–Litterman framework with the return-factor correlation information captured in the multi-factor model. The optimal estimator derived from our model improves accuracy in estimating expected returns and covariance matrix. We build optimal portfolios using our BL-MF model and benchmarks, adhering to both standard and criteria tailored for capturing tail risk with non-normal return distributions. Out-of-sample tests show our BL-MF portfolios outperform various benchmarks, and robustness checks validate this performance advantage, regardless of changes in sub-period, estimation window length or data frequency.

Keywords: Black–Litterman; Multi-factor model; Fusion model; Optimal portfolios; Tail risk (search for similar items in EconPapers)
JEL-codes: C44 C51 G11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:80:y:2025:i:c:s1544612325007238

DOI: 10.1016/j.frl.2025.107464

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