A novel integration of the Fama–French and Black–Litterman models to enhance portfolio management
- Authors
- Ko, Hyungjin; Son, Bumho; Lee, Jaewook
- Issue Date
- Mar-2024
- Publisher
- Elsevier Ltd
- Keywords
- Asset allocation; Asset pricing; Black–Litterman portfolio model; Estimation error; Factor model; Fama–French three-factor model; Mean-variance portfolio model; Portfolio management
- Citation
- Journal of International Financial Markets, Institutions and Money, v.91
- Journal Title
- Journal of International Financial Markets, Institutions and Money
- Volume
- 91
- URI
- https://scholarworks.bwise.kr/cau/handle/2019.sw.cau/72034
- DOI
- 10.1016/j.intfin.2024.101949
- ISSN
- 1042-4431
1873-0612
- Abstract
- We propose a novel portfolio model integrating the Fama–French three-factor model into the Black–Litterman framework, enabling efficient investment strategies. The model surpasses traditional benchmarks, significantly increasing alpha, minimizing estimation error, and improving diversification. Performance improvements are shown by a tripled Sharpe ratio and doubled Certainty Equivalent Return compared to standard models. It maintains stability across different parameters and economic climates, leveraging improved weight adjustment to reduce estimation errors and withstand market volatility. It provides a new perspective for portfolio construction, leveraging long-term insights from asset pricing theory with significant implications. © 2024 Elsevier B.V.
- Files in This Item
-
- Appears in
Collections - College of Business & Economics > School of Business Administration > 1. Journal Articles
Items in ScholarWorks are protected by copyright, with all rights reserved, unless otherwise indicated.