Extending Black-Litterman Analysis Beyond the Mean-Variance Framework

In this paper, we introduce a suitable extension of the Black-Litterman Bayesian approach to portfolio construction in the presence of non-trivial preferences about higher moments of asset return distributions.

Author(s):

Lionel Martellini

Professor of Finance and Scientific Director of the EDHEC Risk and Asset Management Research Centre

Volker Ziemann

Research Engineer at the EDHEC Risk and Asset Management Research Centre

We also present an application to active style allocation decisions in the hedge fund universe. Overall the results in this paper suggest that significant value can be added in a hedge fund portfolio through the systematic implementation of active style allocation decisions provided that a sound investment process is implemented that accounts for both non-normality and parameter uncertainty in hedge fund return distributions.
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Extending Black-Litterman Analysis Beyond the Mean-Variance Framework...
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Type: Working paper
Date: le 01/10/2007
Extra information : Pour plus d'informations, nous vous prions de vous adresser à Joanne Finlay, Direction de la recherche de l'EDHEC [ joanne.finlay@edhec.edu] Les opinions exprimées sont celles de l'auteur et n'engagent pas la responsabilité de l'EDHEC.
Research Cluster : Finance

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