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Time-Dependent Black–Litterman

Author

Listed:
  • Martin Schans

    (Ortec Finance)

  • Hens Steehouwer

    (Ortec Finance)

Abstract

The Black–Litterman method is widely used in the investment management industry to incorporate views in investment portfolios. The method applies when views are expressed as expected returns over the horizon for which allocation decisions are made, i.e., the investment horizon. In practice, however, the investor’s views are typically formulated for the near future while the investor’s investment horizon is much longer. To incorporate such views, we introduce the time-dependent Black–Litterman method and show that, in a time-dependent setting, a distinction should be made between unconditional and conditional views. Furthermore, we demonstrate its use for buy and hold investors. In an example, we show that the investor’s views have a plausible impact on resulting allocation decisions.

Suggested Citation

  • Martin Schans & Hens Steehouwer, 2017. "Time-Dependent Black–Litterman," Journal of Asset Management, Palgrave Macmillan, vol. 18(5), pages 371-387, September.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:5:d:10.1057_s41260-017-0042-y
    DOI: 10.1057/s41260-017-0042-y
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    References listed on IDEAS

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    Cited by:

    1. I-Chen Lu & Kai-Hong Tee & Baibing Li, 2019. "Asset allocation with multiple analysts’ views: a robust approach," Journal of Asset Management, Palgrave Macmillan, vol. 20(3), pages 215-228, May.
    2. Frieder Meyer-Bullerdiek, 2021. "Out-of-sample performance of the Black-Litterman model," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 10(2), pages 1-2.
    3. Misha van Beek, 2020. "Consistent Calibration of Economic Scenario Generators: The Case for Conditional Simulation," Papers 2004.09042, arXiv.org.

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