Copula-based Black–Litterman portfolio optimization

Maziar Sahamkhadam, Andreas Stephan and Ralf Östermark

European Journal of Operational Research, 2022, vol. 297, issue 3, 1055-1070

Abstract: We extend the Black-Litterman (BL) approach to incorporate tail dependency in portfolio optimization and estimate the posterior joint distribution of returns using vine copulas. Our novel copula-based BL (CBL) model leads to flexibility in modeling returns symmetric and asymmetric multivariate distribution from a range of copula families. Based on a sample of the Eurostoxx 50 constituents (also for S&P 100 as robustness check), we evaluate the performance of the suggested CBL approach and portfolio optimization technique using out-of-sample back-testing. Our empirical analysis and robustness check indicate better performance for the CBL portfolios in terms of lower tail risk and higher risk-adjusted returns, compared to the benchmark strategies.

Keywords: Finance; Portfolio optimization; Black–Litterman framework; Truncated regular vine copula; Tail constraints; Conditional value-at-risk (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:297:y:2022:i:3:p:1055-1070

DOI: 10.1016/j.ejor.2021.06.015

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