Debiased Expert Forecasts in Continuous Time Asset Allocation
43 Pages Posted: 22 Sep 2015 Last revised: 23 Dec 2019
Date Written: December 14, 2019
This paper examines the effect of biased expert opinions on asset allocations. Expert opinions, such as brokerage research and analyst views, are an essential component of the asset management sector and an important research topic. However, the effect of behavioral biases on expert opinions is generally ignored. We find that biases have a significant impact on portfolios, explaining nearly half of the effect of expert opinions and up to 70% of excess risk-taking in our implementation. To address the impact of behavioral biases on expert opinions, we propose an integrated behavioral continuous-time portfolio selection model which we solve in closed form. This model recommends general principles to identify and reduce the impact of five main behavioral biases. The model concludes with a new personal fractional Kelly decomposition to account for the effect of opinions on the optimal asset allocation.
Keywords: Behavioral Finance; Black-Litterman; Expert Opinions; Kalman Filter; Portfolio Selection; Stochastic Control
JEL Classification: C61; G11; G41
Suggested Citation: Suggested Citation