A Quantitative Implementation of Black Litterman Model

Abstract

Motivated to examine the effectiveness of the Black-Litterman model and find a more practical model for portfolio optimization, we extend our previous paper on the comparison of three risk measures: variance, expected shortfall and factor model covariance. We collected investors' views from analysts' reports and incorporated them into the market views to obtain our posterior returns and conducted the Markowitz portfolio optimization with the risk measures. By tuning the constraints and parameters over the period of 2010 to 2014, we showed that the implementation of the BL model helps enhance the portfolio performance and the outperformance is consistent throughout all of the three risk measures for 2014-2018. Therefore, our paper makes a contribution by providing a quantitative approach of obtaining investor’s views. We found an empirical evidence of the effectiveness of the Black-Litterman model, which advocates for the application of the Black-Litterman model for portfolio management in the financial industry.

Sijia Fan

PhD student in Applied Economics and Management

My research interests include empirical finance and environmental economics.