The Augmented Black-Litterman Model: A Ranking-Free Approach to Factor-Based Portfolio Construction and Beyond

Authors: Cheung, W.

Journal: Quantitative Finance

Volume: 13

Issue: 2

Pages: 301-316

Publisher: Taylor & Francis

ISSN: 1469-7688

DOI: 10.1080/14697688.2012.714902


The Fama and French (1992 and 1993 etc.) factor-ranking approach suffers from hidden factor view, information inefficiency etc. issues. Based on the Black-Litterman model (Black and Litterman, 1992; as explained in Cheung, 2010), we develop a technique that endogenises the ranking process and elegantly resolves these issues. This model explicitly seeks forward-looking factor views and smoothly blends them to deliver robust allocation to securities. Our numerical experiments show this is an intuitive and practical framework for factor-based portfolio construction, and beyond.

Source: Manual