The impact of global economic policy uncertainty on portfolio optimization: A Black–Litterman approach

Yingwei Han and Jie Li

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: This paper investigates the asymmetric impact of global economic policy uncertainty (GEPU) on global asset allocation. We employ the Double Asymmetric GARCH-MIDAS (DAGM) model to examine the asymmetric effect of GEPU shocks on long-term volatilities of global equities, bonds, commodities, clean energy and Bitcoin. The GEPU-based volatility is used as a proxy for the uncertainty of the investor’s views in the Black-Litterman (BL) framework. Empirical results show that the BL model with GEPU-based views yields higher out-of-sample risk-adjusted returns than other traditional benchmarks in most cases. The findings suggest that investors should consider the influence of GEPU when making portfolio decisions.

Keywords: Black–Litterman; Portfolio optimization; Asymmetry; GARCH-MIDAS; Economic policy uncertainty (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s1057521922004264

DOI: 10.1016/j.irfa.2022.102476

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