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Incorporating uncertainty into the Black-Litterman portfolio selection model

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  • Joseph Simonian
  • Josh Davis

Abstract

We present a robust Black-Litterman (BL) model that takes into account the possibility of model misspecification. In place of a single prior distribution, we utilize multiple priors around the estimated expected excess returns and covariance matrix. The model has two primary advantages over the original BL model: (1) it systematically incorporates model misspecification in the form of Kullback-Leibler (KL) divergence and (2) by explicitly targeting robust allocations, it improves upon traditional bootstrap approaches.

Suggested Citation

  • Joseph Simonian & Josh Davis, 2011. "Incorporating uncertainty into the Black-Litterman portfolio selection model," Applied Economics Letters, Taylor & Francis Journals, vol. 18(17), pages 1719-1722.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:17:p:1719-1722
    DOI: 10.1080/13504851.2011.562151
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    Cited by:

    1. Yue Wang & Zhijian Qiu & Xiaomei Qu, 2017. "Optimal portfolio selection with maximal risk adjusted return," Applied Economics Letters, Taylor & Francis Journals, vol. 24(14), pages 1035-1040, August.

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