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Fully Flexible Views in Multivariate Normal Markets

Author

Listed:
  • Attilio Meucci
  • David Ardia
  • Simon Keel

Abstract

The Entropy Pooling approach in Meucci (2008) is a versatile, general framework to process market views in portfolio construction and generalized stress-tests in risk management. Here we present an efficient algorithm to implement Entropy Pooling with fully general views in multivariate normal markets. Then we discuss two applications. First, we use normal Entropy Pooling to estimate a market distribution consistent with the CAPM equilibrium, which improves on the “implied returns” a-la-Black and Litterman (1990) and can be used as the starting point for portfolio construction. Second, we use normal Entropy Pooling to process ranking signals for alpha-generation.

Suggested Citation

  • Attilio Meucci & David Ardia & Simon Keel, 2013. "Fully Flexible Views in Multivariate Normal Markets," Cahiers de recherche 1311, CIRPEE.
    • Handle: RePEc:lvl:lacicr:1311
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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2013/CIRPEE13-11.pdf
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    More about this item

    Keywords

    Portfolio construction; tactical allocation; Entropy Pooling; Kullback-Leibler; Black-Litterman; equilibrium prior; portfolios from sorts; ranking; alpha; signals; factor models; risk management;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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