International asset allocation using the market implied cost of capital

Patrick Bielstein ()
Additional contact information
Patrick Bielstein: Technical University of Munich

Financial Markets and Portfolio Management, 2018, vol. 32, issue 1, No 2, 17-51

Abstract: Abstract The Black and Litterman (Financ Anal J 48(5):28–43, 1992) (BL) approach to portfolio optimization requires investor views on expected asset returns as an input. I demonstrate that the market implied cost of capital (ICC) is ideal for quantifying those views on a country level. I benchmark this approach against a BL optimization using time-series models as investor views, the equally weighted portfolio, and allocation methods based on stock market capitalization and GDP. I find that the ICC portfolio offers an increase in average return of 2.1 percentage points (yearly) as compared to the value-weighted portfolio, while having a similar standard deviation. The resulting difference in Sharpe ratios is statistically significant and robust to the inclusion of transaction costs, varying BL parameters, and a less strictly defined investment universe.

Keywords: International asset allocation; Black–Litterman optimization; Implied cost of capital (search for similar items in EconPapers)
JEL-codes: G11 G17 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s11408-017-0302-3 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:fmktpm:v:32:y:2018:i:1:d:10.1007_s11408-017-0302-3

Ordering information: This journal article can be ordered from
http://www.springer. ... nt/journal/11408/PS2

DOI: 10.1007/s11408-017-0302-3

Access Statistics for this article

Financial Markets and Portfolio Management is currently edited by Manuel Ammann

More articles in Financial Markets and Portfolio Management from Springer, Swiss Society for Financial Market Research Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().