An Empirical Study on Stock-Bond Rotation Strategy Based on the Black-Litterman Model in the UK Stock Market

Chenlu Gan ()
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Chenlu Gan: King’s College London, Faculty of Social Science & Public Policy

A chapter in Proceedings of the 2026 11th International Conference on Financial Innovation and Economic Development (ICFIED 2026), 2026, pp 25-34 from Springer

Abstract: Abstract The growing instability of financial markets is making it harder to allocate capital efficiently among key asset types such as equities and bonds. Traditional static asset allocation methods struggle to adapt to dynamic market conditions, leading to growing interest in dynamic allocation strategies in recent years. Using the Black-Litterman model, the paper constructs a dynamic UK asset allocation framework to implement equity-bond rotation, evaluating their impact on portfolio performance and risk control. Specifically, the possibility of achieving improved investment returns via the adjustment of allocation weights between equities and bonds under different market conditions is investigated. Based on data from the Financial Times Stock Exchange (FTSE) 100 Index and UK government bonds spanning 2010 to 2023, asset weights are computed using the Black-Litterman model, and statistical methods are adopted to analyze return characteristics and their correlations. The results indicate that portfolios dynamically adjusted using the Black-Litterman model outperform traditional static strategies. Besides, economies of scale favor equities, showing that higher equity allocations may deliver stronger returns in current market conditions. In short, the Black-Litterman dynamic rotation portfolio (Portfolio 1) achieves superior risk-adjusted returns in the UK market and proves highly practical.

Keywords: Stock-Bond Rotation; Black-Litterman Model; UK Stock Market; Investment Strategies (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6239-642-5_4

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DOI: 10.2991/978-94-6239-642-5_4

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