Fully Flexible Views in Multivariate Normal Markets
SYMMYS; Kepos Capital
Laval University - Département de Finance et Assurance; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)
Aeris Capital AG
January 17, 2011
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-Litterman and can be used as the starting point for portfolio construction. Second, we use normal Entropy Pooling to process ranking signals for alpha-generation.
Number of Pages in PDF File: 12
Keywords: Portfolio Construction, Tactical Allocation, Entropy Pooling, Kullback-Leibler, Black-Litterman, Equilibrium Prior, Portfolios From Sorts, Ranking, Alpha, signals, Factor Models, Risk Management
JEL Classification: C1, G11working papers series
Date posted: May 13, 2011 ; Last revised: May 15, 2011
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