A Simple Procedure to Incorporate Predictive Models in a Continuous Time Asset Allocation
Quantitative Finance Letters, Forthcoming
12 Pages Posted: 13 Feb 2016
Date Written: February 1, 2016
Stochastic optimisation has found a fertile ground for applications in finance. One of the greatest challenges remains to incorporate a set of scenarios that accurately models the behaviour of financial markets, and in particular their behaviour during crashes and crises, without sacrificing the the tractability of the optimal investment policy. This paper shows how to incorporate return predictions and crash predictions as views into continuous time asset allocation models.
Keywords: Black-Litterman, Kalman filter, stochastic control, risk-sensitive control, asset management, expert opinion, equity market crashes, BSEYD, CAPE
JEL Classification: C11, C13, C61, G11
Suggested Citation: Suggested Citation