Beyond Black-Litterman: Views on Non-Normal Markets

Abstract

We extend the Black-Litterman methodology to generic non-normal market distributions and non-normal views. We draw on the copula and opinion pooling literature to express views directly on the market realizations, instead of the market parameters as in the Black-Litterman case. We compare the two approaches and we show an application to a thick-tailed, skewed and highly dependent market, where the views are expressed as uncertainty ranges.

Keywords: opinion pooling, copula, views, fat tails, Bayesian prior, posterior, Monte Carlo, quantitative portfolio management, asset allocation, skew t distribution, CVaR, expected shortfall

JEL Classification: C11, G11