The dynamic Black-Litterman approach to asset allocation

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 22 April 2016

Working Paper No. 596
By Richard D F Harris, Evarist Stoja and Linzhi Tan 

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.

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