The Dynamic Black-Litterman Approach to Asset Allocation

35 Pages Posted: 30 Apr 2016

See all articles by Richard D. F. Harris

Richard D. F. Harris

University of Exeter - Business School; University of Exeter

Evarist Stoja

University of Bristol

Linzhi Tan

Nottingham Trent University - Department of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 22, 2016

Abstract

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

Suggested Citation

Harris, Richard D. F. and Stoja, Evarist and Tan, Linzhi, The Dynamic Black-Litterman Approach to Asset Allocation (April 22, 2016). Bank of England Working Paper No. 596. Available at SSRN: https://ssrn.com/abstract=2772561 or http://dx.doi.org/10.2139/ssrn.2772561

Richard D. F. Harris (Contact Author)

University of Exeter - Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

University of Exeter ( email )

Northcote House
The Queen's Drive
Exeter, Devon EX4 4QJ
United Kingdom

Evarist Stoja

University of Bristol ( email )

School of Economics, Finance and Management
8 Woodland Road
Bristol, BS8 1TN
United Kingdom

HOME PAGE: http://sites.google.com/view/evarist-stoja/

Linzhi Tan

Nottingham Trent University - Department of Accounting and Finance ( email )

United Kingdom

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