Fully flexible extreme views

Attilio Meucci, David Ardia & Simon Keel

Abstract We extend the Fully Flexible Views generalization of the Black-Litterman approach to effectively handle extreme views on the tails of a distribution.

First, we provide a recursive algorithm to process views on the conditional value at risk, which cannot be handled directly by the original implementation of Fully Flexible Views.

Second, we represent both the prior and the posterior distribution on a grid, instead of by means of Monte Carlo scenarios: this way it becomes possible to cover parsimoniously even the far tails of the underlying distribution. Documented code is available for download.
Keywords Entropy Pooling, Kullback-Leibler, Black-Litterman, VaR, CVaR, grid-probability pair, Monte Carlo, Gauss-Hermite polynomials, Newton-Raphson, kernel estimator
Citation Meucci, A., Ardia, D., & Keel, S. (2011). Fully flexible extreme views. Journal of Risk, 14(2), 39-49.
Type Journal article (English)
Date of appearance 2011
Journal Journal of Risk
Volume 14
Issue 2
Pages 39-49
URL http://www.risk.net/journal-of-risk/technical-paper/21610...