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Copula-based Black-Litterman portfolio optimization
Linnaeus University.
Jönköping University, Jönköping International Business School, JIBS, Economics. Jönköping University, Jönköping International Business School, JIBS, Centre for Family Entrepreneurship and Ownership (CeFEO). Jönköping University, Jönköping International Business School, JIBS, Centre for Entrepreneurship and Spatial Economics (CEnSE).ORCID iD: 0000-0001-5776-9396
School of Business and Economics, Åbo Akademi University.
2020 (English)Report (Other academic)
Abstract [en]

We extend the Black-Litterman (BL) approach to incorporate tail dependency in portfolio optimization and estimate the posterior joint distribution of returns using vine copulas. Our novel copula-based BL (CBL) model leads to flexibility in modeling returns symmetric and asymmetric multivariate distribution from a range of copula families. Based on a sample of 30 stocks, we evaluate the performance of the suggested CBL approach and portfolio optimization technique using out-of-sample back-testing. Our empirical analysis and robustness check indicate better performance for the CBL portfolios in terms of lower tail risk and higher risk-adjusted returns, compared to the benchmark strategies.

Place, publisher, year, edition, pages
SSRN , 2020. , p. 32
Keywords [en]
Finance, portfolio optimization, Black-Litterman framework, truncated regular vine copula, tail constraints, conditional value-at-risk
National Category
Business Administration
Identifiers
URN: urn:nbn:se:hj:diva-50827OAI: oai:DiVA.org:hj-50827DiVA, id: diva2:1475520
Available from: 2020-10-13 Created: 2020-10-13 Last updated: 2020-10-13Bibliographically approved

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Stephan, Andreas

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