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Fully Flexible Extreme Views

Journal of Risk, Vol. 14, No. 2, pp. 39-49, Winter 2011/2012

11 Pages Posted: 25 Jan 2010 Last revised: 12 Jan 2012

Attilio Meucci

ARPM - Advanced Risk and Portfolio Management

David Ardia

University of Neuchatel - Institute of Financial Analysis; Laval University - Département de Finance et Assurance

Simon Keel

Aeris Capital AG

Date Written: January 25, 2010

Abstract

We extend the Fully Flexible Views generalization of the Black-Litterman approach to effectively handle extreme views on the tails of a distribution.

First, we provide a recursive algorithm to process views on the conditional value at risk, which cannot be handled directly by the original implementation of Fully Flexible Views.

Second, we represent both the prior and the posterior distribution on a grid, instead of by means of Monte Carlo scenarios: this way it becomes possible to cover parsimoniously even the far tails of the underlying distribution. Documented code is available for download.

Keywords: Entropy Pooling, Kullback-Leibler, Black-Litterman, VaR, CVaR, grid-probability pair, Monte Carlo, Gauss-Hermite polynomials, Newton-Raphson, kernel estimator

JEL Classification: C1, G11

Suggested Citation

Meucci, Attilio and Ardia, David and Keel, Simon, Fully Flexible Extreme Views (January 25, 2010). Journal of Risk, Vol. 14, No. 2, pp. 39-49, Winter 2011/2012. Available at SSRN: https://ssrn.com/abstract=1542083

Attilio Meucci (Contact Author)

ARPM - Advanced Risk and Portfolio Management ( email )

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

David Ardia

University of Neuchatel - Institute of Financial Analysis ( email )

Rue A.-L. Breguet 2
Neuchatel, CH-2000
Switzerland

Laval University - Département de Finance et Assurance ( email )

Pavillon Palasis-Prince
Quebec G1K 7P4
Canada

Simon Keel

Aeris Capital AG ( email )

Schützenstrasse 4
Pfäffikon SZ
Switzerland

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