Black-Litterman and Beyond: The Bayesian Paradigm in Investment Management

The Journal of Portfolio Management, to appear, 2021.

Posted: 9 Mar 2021

See all articles by Petter N. Kolm

Petter N. Kolm

New York University (NYU) - Courant Institute of Mathematical Sciences

Gordon Ritter

New York University (NYU) - Courant Institute of Mathematical Sciences; City University of New York (CUNY) - Weissman School of Arts and Sciences; Rutgers, The State University of New Jersey - Financial Statistics & Risk Management; New York University (NYU) - NYU Tandon School of Engineering

Joseph Simonian

Natixis Investment Managers, L.P.

Date Written: January 19, 2021

Abstract

The Black-Litterman model is one of the most popular models in quantitative finance, with numerous theoretical and practical achievements. From the standpoint of investment theory, the Black-Litterman model allows a seamless incorporation of Bayesian statistics into the portfolio optimization process. From a practical standpoint, it provides portfolio managers with a structured approach to express subjective views, thereby freeing their investment processes from a total reliance on backward-looking historical data. In this article, the authors provide an overview of the original Black-Litterman model and its various extensions and enhancements addressing issues in real-world trading and investment management.

Keywords: Bayesian statistics, Black-Litterman, Factor investing, Investment management, Portfolio optimization, Portfolio theory, Risk premia, Robust portfolio management, Trading, Transaction costs, Views

JEL Classification: G11, C61, C11

Suggested Citation

Kolm, Petter N. and Ritter, Gordon and Simonian, Joseph, Black-Litterman and Beyond: The Bayesian Paradigm in Investment Management (January 19, 2021). The Journal of Portfolio Management, to appear, 2021. , Available at SSRN: https://ssrn.com/abstract=3769513

Petter N. Kolm (Contact Author)

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY 10012
United States

Gordon Ritter

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

New York University
251 Mercer Street
New York, NY 10012
United States

City University of New York (CUNY) - Weissman School of Arts and Sciences ( email )

One Bernard Baruch Way
New York, NY 10010
United States

Rutgers, The State University of New Jersey - Financial Statistics & Risk Management ( email )

110 Frelinghuysen Road
479 Hill Center, Busch Campus
Piscataway, NJ 08854
United States

New York University (NYU) - NYU Tandon School of Engineering ( email )

6 MetroTech Center
Brooklyn, NY 11201
United States

Joseph Simonian

Natixis Investment Managers, L.P. ( email )

888 Boylston Street
Boston, MA 02199

HOME PAGE: http://https://www.im.natixis.com/us/bio/joseph-simonian

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