Black-Litterman in Continuous Time: The Case for Filtering

Quantitative Finance Letters, Forthcoming

11 Pages Posted: 9 May 2013 Last revised: 4 Jul 2013

See all articles by Mark Davis

Mark Davis

Imperial College London

Sebastien Lleo

NEOMA Business School

Date Written: May 15, 2013

Abstract

In this article, we extend the Black-Litterman approach to a continuous time setting. We model analyst views jointly with asset prices to estimate the unobservable factors driving asset returns. The key in our approach is that the filtering problem and the stochastic control problem are effectively separable. We use this insight to incorporate analyst views and non-investable assets as observations in our filter even though they are not present in the portfolio optimization.

Keywords: Black-Litterman, Kalman filter, stochastic control, risk-sensitive control, asset management, parameter estimation, expert opinion

JEL Classification: C11, C13, C61, G11

Suggested Citation

Davis, Mark and Lleo, Sebastien, Black-Litterman in Continuous Time: The Case for Filtering (May 15, 2013). Quantitative Finance Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2261999

Mark Davis

Imperial College London ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
02075948486 (Phone)

HOME PAGE: http://www.ma.ic.ac.uk/~mdavis

Sebastien Lleo (Contact Author)

NEOMA Business School ( email )

Reims
France

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