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Generalised Factor View Blending: Augmented Black-Litterman in Non-Normal Financial Markets with Non-Linear Instruments

Posted: 25 Aug 2009 Last revised: 25 Jan 2016

Wing Cheung

Independent

Date Written: April 28, 2009

Abstract

The augmented Black-Litterman (ABL) model is an elegant view processor, as well as a natural, robust and unified allocation framework suitable for multiple investment styles (Cheung, 2009B&C). In this paper, we extend the model into a generalised factor view blending (GFVB) framework, suitable for tail risk-aware allocation in non-normal markets with non-linear instruments, factor structures and views. We highlight the following features: 1) Freedom in considering any market factor structure with any security and factor distributions, 2) Generic prior distribution without normality restrictions, 3) Freedom in forming non-linear, non-normal views, 4) View blending strictly based on the Bayes' Rule, 5) A structural approach to constructing portfolio of exotic products.

Keywords: Augmented Black-Litterman (ABL), view blending and shrinkage, Bayes' Rule, CAPM, semi-strong market efficiency, non-normality, non-linear factor model, Monte Carlo, Bayesian posterior sampling, portfolio construction, optimisation, robustness, CVaR minimisation

JEL Classification: C10, C11, C15, C61, G11, G14

Suggested Citation

Cheung, Wing, Generalised Factor View Blending: Augmented Black-Litterman in Non-Normal Financial Markets with Non-Linear Instruments (April 28, 2009). Available at SSRN: https://ssrn.com/abstract=1395283 or http://dx.doi.org/10.2139/ssrn.1395283

Wing Cheung (Contact Author)

Independent ( email )

No Address Available

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