ASSESSING THE VALUE OF SUBJECTIVE VIEWS ON MACROECONOMIC FACTORS VIA BLACK-LITTERMAN BASED PORTFOLIO OPTIMIZATION

ABSTRACT

Black and Litterman proposed a portfolio selection model that blends investor’s views on asset returns with market equilibrium concepts to construct optimal portfolios. However, the model efficiency relies on the performance of investors’ views regarding tradable assets, which is challenging in practice. Venturing to improve Black-Litterman practical application, this work provides new insights based on views about macroeconomic factors, which are largely available, though not directly tradable. The main advantage is that market players usually provide predictions on these factors publicly. We present a case study based on the information disclosed by the Brazilian Central Bank to validate the proposed framework. The out-of-sample, risk-adjusted returns obtained incorporating the players’ macroeconomic expectations applying the proposed framework outperformed the traditional mean-variance model as well as the Brazilian stock index benchmark.

Keywords:
portfolio optimization; Black-Litterman; factor investment; macroeconomic subjective views