The Dynamic Black-Litterman Approach to Asset Allocation
35 Pages Posted: 30 Apr 2016
Date Written: April 22, 2016
We generalise the Black-Litterman (BL) portfolio management framework to incorporate time-variation in the conditional distribution of returns in the asset allocation process. We evaluate the performance of the dynamic BL model using both standard performance ratios as well as other measures that are designed to capture tail risk in the presence of non-normally distributed asset returns. We find that dynamic BL model outperforms a range of different benchmarks. Moreover, we show that the choice of volatility model has a considerable impact on the performance of the dynamic BL model.
Keywords: Black-Litterman model, multivariate conditional volatility, portfolio optimization, non-normality, tail risk
JEL Classification: C22, C53, G11
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