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Apr 15

Stress testing under Black Litterman framework

Posted by abiao at 17:57 | Code » Matlab | Comments(0) | Reads(7973)
Black Litterman model has been used largely for portfolio construction, one of the major differences with Markowitz mean-variance Efficient Frontier model, among others, is BL allows users to input certain views under confidence level on assets, say, "I am 85% confident S&P 500 will have 5% excess return", or "Bond index will outperform equity index by 1.5% certainly", etc. If you are totally fresh to Black Litterman model, click here.

Most of paper on Black litterman are about how to construct an optimized portfolio, and this portfolio can be adjusted under given risk constraint, Attilio Meucci, going further step, has a paper incorporating natually stress testing and scenerio analysis under Black Litterman framework, they propose a unified methodology to input non-linear views from any number of users in fully general non-normal markets, and perform, among others, stress-testing, scenario analysis, and ranking allocation. Paper "Fully Flexible Views: Theory and Practice" and Matlab codes are at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1213325 and http://www.mathworks.com/matlabcentral/fileexchange/21307.

Just finished an interview today, Balabala one and half an hour without even a detailed technical question, I suspect if it is really a Quant related job position or the desire the company indeed needs a people. Anyway, fighting.

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