Title: Multivariate GARCH models and the Black-Litterman approach for tracking error constrained portfolios: an empirical analysis

Authors: Giulio Palomba

Addresses: Dipartimento di Economia, Universita Politecnica delle Marche, Piazzale Martelli 8, 60121 Ancona, Italy

Abstract: In a typical tactical asset allocation setup, managers generally make their choices with the aim of beating a benchmark portfolio. In this context, the pure Markowitz (1959) strategy does not take two aspects into account: asset returns often show changes in volatility and managers| decisions depend on private information. This paper provides an empirical model for large-scale tactical asset allocation with multivariate GARCH estimates, given a tracking error constraint. Moreover, the Black and Litterman (1991) approach makes it possible to tactically manage the selected portfolio by combining information taken from the time-varying volatility model with some personal |views| about asset returns.

Keywords: asset returns; tactical asset allocation; TAA; multivariate GARCH models; tracking error constraints; error-constrained portfolios; Black and Litterman approach.

DOI: 10.1504/GBER.2008.020592

Global Business and Economics Review, 2008 Vol.10 No.4, pp.379 - 413

Published online: 01 Oct 2008 *

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