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Fully Flexible Views in Multivariate Normal Markets

Attilio Meucci, David Ardia and Simon Keel

Cahiers de recherche from CIRPEE

Abstract: The Entropy Pooling approach in Meucci (2008) is a versatile, general framework to process market views in portfolio construction and generalized stress-tests in risk management. Here we present an efficient algorithm to implement Entropy Pooling with fully general views in multivariate normal markets. Then we discuss two applications. First, we use normal Entropy Pooling to estimate a market distribution consistent with the CAPM equilibrium, which improves on the “implied returns” a-la-Black and Litterman (1990) and can be used as the starting point for portfolio construction. Second, we use normal Entropy Pooling to process ranking signals for alpha-generation.

Keywords: Portfolio construction; tactical allocation; Entropy Pooling; Kullback-Leibler; Black-Litterman; equilibrium prior; portfolios from sorts; ranking; alpha; signals; factor models; risk management (search for similar items in EconPapers)
JEL-codes: C1 G11 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-rmg
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