Jay's Asset Allocation Blog

Blog about my off-hours work on the problem of Asset Allocation including but not limited to Portfolio Optimization algorithms, algorithms and approaches for improved estimation of Asset Allocation inputs and other potentially related items.

Wednesday, January 6, 2010

A few new papers

I've not been too busy with this project lately, but I'm back.

I read an interesting paper recently, A Sharper Angle on Optimization, by Max Golts and Gregory Jones. I'm always looking out for new takes on improving correlation matrices, and ones which have a geometric point of view seem like they should have some intuitive feel. I've only read through this once, and not yet tried to implement it, but I like there ideas. I'm sure I'll be blogging a bit more on this after I've had time to read and digest the paper.

On the Black-Litterman front, I've had several folks send me helpful information, the most recent is Allaj Erwindi giving me the pointer that I could save some trees in my paper by referring to the Sherman-Morrison formula (which I work through in an appendix of the paper without knowing the name). Thanks, the next version of the paper will be shorter and will include references to this formula.

Tuesday, September 15, 2009

Diversification and Entropy

Haven't posted in a while.

Just read an interesting paper by Attilio Meucci Managing Diversification. He goes through some interesting workings to come up with a utility function which allows the investor to trade off diversification versus return. I did some work a while back on entropy and diversification, getting to the point of a paper 2/3 of the way done, but lost momentum. Anyways, this gets me stoked back up to look at the problem of diversification as it's one important to an individual investor as well as an institutional investor.

Dr Meucci is doing a bit of a roadshow with this new work under the auspices of Bloomber University, though the Boston even which I was hoping to attend was canceled at the last minute. Hopefully, it'll be rescheduled soon.

Monday, July 13, 2009

Interesting papers

I've been reading two papers lately related to Black-Litterman and one that isn't. Mark Kritzman's paper on asset allocation in turbulent regimes is pretty interesting, I'm working on some code to try it out. On the Black-Litterman front, I've been checking out The Augmented Black-Litterman Model which covers a new way to integrate factor models with Black-Litterman. I've plans to write a paper comparing some results from a factor model for tactical asset allocation using Wing Cheung's methods and also the more straight forward two-step approach.

Finally I also came across A VaR Black-Litterman Model which is an interesting paper as well. The author goes into some depth of the implementation of their optimization algorithms which intrigues me as they cover a pretty complex problem with integer and linear constraints.

Friday, June 12, 2009

Updated Applet

So I've updated the Applet, took me longer than I thought. It's still a little under development, but the new one is posted and it should be easier to use. Right now it doesn't allow a whole bunch of changes to the problem yet, that will come later.

It has some tooltips and hopefully it will be more intuitive to use than the previous one. It has the same set of charts, but they aren't in the same place anymore.

Monday, June 8, 2009

Updating the Applet

I moved the paper to SSRN and now the BLApplet comes up top on Google so I'm trying to clean it up. The old one is quite idiosyncratic with odd keystrokes and now I'm trying to move to a more intuitive design. It is a fun challenge and I haven't been doing much Swing lately at work so it's a fun distraction as well. I will post again when I get it done, though I'm hoping it's not more than a few more days before I can get the alpha release of the new version up there!

Thursday, May 28, 2009

Robustification of Black-Litterman

I'm reading a paper, "Comparison and robustification of Bayes and
Black-Litterman models", by Schottle, Werner and Zagst
. It is interesting in how they build up a Bayesian framework to get uncertainty in the variance of the distribution. Usually in Black-Litterman, the only uncertainty in the variance comes from the uncertainty in the estimate of the mean, so this is a way to add another degree of freedom to the problem. I'd like to build up the MATLAB code to work on this and see how it goes.

Of course, I've also come across some interesting papers on factor models with Black-Litterman and need to digest those. So many things to do. I'm adding links and quick descriptions of all the papers to my RSS feed, so you can pick the papers up from there if you are interested.

Saturday, May 23, 2009

Qian and Gorman

I've been working on understanding paper for oh so long, and finally figured it out. Not sure if it's a testament to other than my follow through on the task, but it feels nice.

It seems they came up with a posterior variance formula different from the Black-Litterman model's posterior variance, and with some less than optimal characteristics. It doesn't include mixing, and it doesn't generally decrease because of the mixing, it can increase. They describe it as allowing the investor to specify views on covariance, but I am stuck on the math. It is not so obvious how the investors view mixes (at least to me), for example any non-zero investors view on variance will increase the posterior variance.

I need to read a bit more on how it should be used in order to really understand what they've done.

I've added a new section to the paper covering this analysis, but in the end it's just tying up a loose end and not really adding anything new to the puzzle.

I've also come across some more new papers, including a few out of Lehman in 2007 which cover some intriguing ways of handling factor models. Factor models and Black-Litterman is definitely an area that I am interested in.