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Fully Flexible Views: Theory and Practice

Fully Flexible Views: Theory and Practice, Risk, Vol. 21, No. 10, pp. 97-102, October 2008

26 Pages Posted: 10 Aug 2008 Last revised: 6 Dec 2010

Attilio Meucci

ARPM - Advanced Risk and Portfolio Management

Date Written: August 8, 2008

Abstract

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.

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, G11

Suggested Citation

Meucci, Attilio, Fully Flexible Views: Theory and Practice (August 8, 2008). Fully Flexible Views: Theory and Practice, Risk, Vol. 21, No. 10, pp. 97-102, October 2008. Available at SSRN: https://ssrn.com/abstract=1213325

Attilio Meucci (Contact Author)

ARPM - Advanced Risk and Portfolio Management ( email )

HOME PAGE: http://www.arpm.co/

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