Generalised Factor View Blending: Augmented Black-Litterman in Non-Normal Financial Markets with Non-Linear Financial Instruments

Wing Cheung

Generalised Factor View Blending: Augmented Black-Litterman in Non-Normal Financial Markets with Non-Linear Financial Instruments

Wing Cheung

Faculty of Business and Law

Research output: Working paper

Abstract

The Augmented Black-Litterman (ABL) model is an elegant view processor, as well as a natural, robust and unified allocation framework suitable for multiple investment styles (Cheung, 2012 & 2009C). In this paper, we extend the model into a generalised factor view blending (GFVB) framework, suitable for tail risk-aware allocation in non-normal markets with non-linear instruments, factor structures and views. We highlight the following features: -
• Freedom in considering any market factor structure with any security and factor distributions
• Generic prior distribution without normality restrictions
• Freedom in forming non-linear, non-normal views
• View blending strictly based on the Bayes’ Rule
• A structural approach to constructing portfolio of exotic products

Original language	English
Publisher	SSRN
Publication status	Published - 2009

Cite this

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title = "Generalised Factor View Blending: Augmented Black-Litterman in Non-Normal Financial Markets with Non-Linear Financial Instruments",

abstract = "The Augmented Black-Litterman (ABL) model is an elegant view processor, as well as a natural, robust and unified allocation framework suitable for multiple investment styles (Cheung, 2012 \& 2009C). In this paper, we extend the model into a generalised factor view blending (GFVB) framework, suitable for tail risk-aware allocation in non-normal markets with non-linear instruments, factor structures and views. We highlight the following features: - • Freedom in considering any market factor structure with any security and factor distributions • Generic prior distribution without normality restrictions • Freedom in forming non-linear, non-normal views • View blending strictly based on the Bayes{\textquoteright} Rule • A structural approach to constructing portfolio of exotic products",

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AB - The Augmented Black-Litterman (ABL) model is an elegant view processor, as well as a natural, robust and unified allocation framework suitable for multiple investment styles (Cheung, 2012 & 2009C). In this paper, we extend the model into a generalised factor view blending (GFVB) framework, suitable for tail risk-aware allocation in non-normal markets with non-linear instruments, factor structures and views. We highlight the following features: - • Freedom in considering any market factor structure with any security and factor distributions • Generic prior distribution without normality restrictions • Freedom in forming non-linear, non-normal views • View blending strictly based on the Bayes’ Rule • A structural approach to constructing portfolio of exotic products

M3 - Working paper

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PB - SSRN

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