liu.seSearch for publications in DiVA
Change search
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • oxford
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf
The Black Litterman Asset Allocation Model: An empirical comparison of approaches for estimating the subjective view vector and implications for risk-return characteristics
Linköping University, Department of Management and Engineering, Economics.
Linköping University, Department of Management and Engineering, Economics.
2018 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

Background

In the early 90’s, Black and Litterman extended the pioneering work of Markowitz by developing a model combining qualitative and quantitative research in a delicate optimization process. It allows for a subjective view parameter in a quantitative model and with absent views, the investor will have no reason to deviate from the market equilibrium portfolio. As one can imagine, the investors’ views incorporated in the Black-Litterman model is crucial and is the unique advantage or problem of the model, depending on the user’s ability to properly forecast expected return. However, it has yet to be covered thoroughly in the academic literature how different approaches for estimating subjective views actually yield a more attractive risk-return profile.

Purpose

In this study we intend to use the Black-Litterman model with subjective views generated from analysts’ forecasts and a statistical valuation multiple in order to compare and analyze how portfolios differentiate regarding asset allocation and risk-return characteristics.

Methodology

Two different valuation approaches are compared and analyzed in the BlackLitterman Asset Allocation Model by running historical simulations on risk adjusted performance. To generate elements for the subjective view vector we use analysts’ forecasts and a statistical valuation multiple approach from a fixed effect panel regression. The empirical study has a Swedish perspective with simulations based on data from the OMXS30, with a analyzed period stretching from March of 2008 to March 2018.

Conclusions

Even though analysts’ forecasts proved to be the most accurate approach estimating the direction of the stock price and outright return for all given time horizons, the statistical counterpart was the superior when applied in a risk adjusted context in the Black-Litterman model. This holds true for the larger portion of occasions when modifying key input variables such as transaction costs, risk aversion, certainty level and time horizon. Our empirical findings show that the BlackLitterman model is suitable for investment managers committing to the CAPM approach to estimate expected return in the long turn, but who still is managing an alpha driven portfolio in the short term, capitalizing on mispricing.

Place, publisher, year, edition, pages
2018. , p. 68
National Category
Economics
Identifiers
URN: urn:nbn:se:liu:diva-151853ISRN: LIU-IEI-FIL-A–18/02864–SEOAI: oai:DiVA.org:liu-151853DiVA, id: diva2:1253673
Subject / course
Master Thesis in International Business and Economics Programme (Business Administration/Economics)
Supervisors
Available from: 2018-10-09 Created: 2018-10-05 Last updated: 2018-10-09Bibliographically approved

Open Access in DiVA

fulltext(1264 kB)1167 downloads
File information
File name FULLTEXT01.pdfFile size 1264 kBChecksum SHA-512
c9f61f48d9cdb7d743ff03bebfad361c427f2d47265a122c7029f42f27616ad4b4b03ec985f6fad10440387f74e87ca9090f1fd216d2ca49afdae459e37b34e7
Type fulltextMimetype application/pdf

By organisation
Economics
Economics

Search outside of DiVA

GoogleGoogle Scholar
Total: 1167 downloads
The number of downloads is the sum of all downloads of full texts. It may include eg previous versions that are now no longer available

urn-nbn

Altmetric score

urn-nbn
Total: 218 hits
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • oxford
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf