Debiased expert forecasts in continuous-time asset allocation

Mark Davis and Sebastien Lleo

Journal of Banking & Finance, 2020, vol. 113, issue C

Abstract: Expert forecasts are an essential component of asset management and an important research topic. However, the effect of behavioral biases on expert forecasts is generally ignored. This paper examines the effect of biased expert forecasts on asset allocations. We find that biases have a significant impact on portfolios, explaining nearly 70% of excess risk-taking in our implementation. To address the effect of behavioral biases, we propose an integrated behavioral continuous-time portfolio selection model which we solve in closed form. The model applies general principles to identify and reduce the impact of five main behavioral biases. This paper concludes with a new personal fractional Kelly decomposition to account for the effect of opinions on the optimal asset allocation.

Keywords: Behavioral finance; Black-Litterman; Expert opinions; Kalman filter; Portfolio selection; Stochastic control (search for similar items in EconPapers)
JEL-codes: C61 G11 G41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:113:y:2020:i:c:s0378426620300261

DOI: 10.1016/j.jbankfin.2020.105759

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