Fully Flexible Views: Theory and Practice
SYMMYS; Kepos Capital
August 8, 2008
Fully Flexible Views: Theory and Practice, Risk, Vol. 21, No. 10, pp. 97-102, October 2008
We propose a unified methodology to input non-linear views from any number of users in fully general non-normal markets, and perform, among others, stress-testing, scenario analysis, and ranking allocation. We walk the reader through the theory and we detail an extremely efficient algorithm to easily implement this methodology under fully general assumptions. As it turns out, no repricing is ever necessary, hence the methodology can be readily applied to books with complex derivatives. We also present an analytical solution, useful for benchmarking, which per se generalizes notable previous results. Code illustrating this methodology in practice is available through author's homepage.
Number of Pages in PDF File: 26
Keywords: Black-Litterman, stress-test, scenario analysis, entropy, opinion pooling, Bayesian theory, Kullback-Leibler, Monte Carlo simulations, importance sampling, fat-tails, median, regime shift, normal mixtures, multi-manager, skill, ranking, ordering information, option trading, macro views
JEL Classification: C1, G11Accepted Paper Series
Date posted: August 10, 2008 ; Last revised: December 6, 2010
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