On the Bayesian interpretation of Black–Litterman

Petter Kolm and Gordon Ritter

European Journal of Operational Research, 2017, vol. 258, issue 2, 564-572

Abstract: We present the most general model of the type considered by Black and Litterman (1991) after fully clarifying the duality between Black–Litterman optimization and Bayesian regression. Our generalization is itself a special case of a Bayesian network or graphical model. As an example, we work out in full detail the treatment of views on factor risk premia in the context of APT. We also consider a more speculative example in which the portfolio manager specifies a view on realized volatility by trading a variance swap.

Keywords: Finance; Investment analysis; Bayesian statistics; Black–Litterman; Portfolio optimization (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:258:y:2017:i:2:p:564-572

DOI: 10.1016/j.ejor.2016.10.027

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