A Simple Procedure to Incorporate Predictive Models in a Continuous Time Asset Allocation

Quantitative Finance Letters, Forthcoming

12 Pages Posted: 13 Feb 2016

See all articles by Mark Davis

Mark Davis

Imperial College London

Sebastien Lleo

NEOMA Business School

Date Written: February 1, 2016

Abstract

Stochastic optimisation has found a fertile ground for applications in finance. One of the greatest challenges remains to incorporate a set of scenarios that accurately models the behaviour of financial markets, and in particular their behaviour during crashes and crises, without sacrificing the the tractability of the optimal investment policy. This paper shows how to incorporate return predictions and crash predictions as views into continuous time asset allocation models.

Keywords: Black-Litterman, Kalman filter, stochastic control, risk-sensitive control, asset management, expert opinion, equity market crashes, BSEYD, CAPE

JEL Classification: C11, C13, C61, G11

Suggested Citation

Davis, Mark and Lleo, Sebastien, A Simple Procedure to Incorporate Predictive Models in a Continuous Time Asset Allocation (February 1, 2016). Quantitative Finance Letters, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2731415

Mark Davis

Imperial College London ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
02075948486 (Phone)

HOME PAGE: http://www.ma.ic.ac.uk/~mdavis

Sebastien Lleo (Contact Author)

NEOMA Business School ( email )

Reims
France

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