Incorporating uncertainty into the Black-Litterman portfolio selection model

Joseph Simonian and Josh Davis

Applied Economics Letters, 2011, vol. 18, issue 17, 1719-1722

Abstract: We present a robust Black-Litterman (BL) model that takes into account the possibility of model misspecification. In place of a single prior distribution, we utilize multiple priors around the estimated expected excess returns and covariance matrix. The model has two primary advantages over the original BL model: (1) it systematically incorporates model misspecification in the form of Kullback-Leibler (KL) divergence and (2) by explicitly targeting robust allocations, it improves upon traditional bootstrap approaches.

Keywords: Black-Litterman; robust optimization; Kullback-Leibler divergence (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:18:y:2011:i:17:p:1719-1722

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DOI: 10.1080/13504851.2011.562151

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