Black-litterman Model In The Chinese Stock Market Asset Allocation

Asset allocation is the most important branch of modern investment theory. Through the stable and reasonable asset allocation, investors can not only earn more profit, but also can effectively avoid investment risks. As the basic operation principle of the fund, asset allocation strategy can explain more than 90% of the fund volatility of returns. So, for institutional investors, asset allocation plays a very important role in increasing the investment performance as well as diversification of risk. In recent years, along with the continuous development of Chinese fund market, the proportion of fund holdings increasing, domestic scholars paid more and more attention on asset allocation. Black-Litterman model was first used by Goldman Sachs Asset Management Company in the early 90's. Nearly 20 years' development, it has been widely used in international asset allocation. This paper provides an application of Black-Litterman asset allocation model in Chinese stock market. The novel feature of this paper relative to the extant literature on Black-Litterman methodology is that we use the returns predicted by ARMA-GARCH model as an input of investor's view returns into the Black-Litterman asset allocation model. So far, there is no model can describe the investors view return, but GARCH model can capture the characteristics such as excess kurtosis, thick tail distribution and time-varying volatility of asset returns. It may be a suitable access to get investor's view.This paper adopts CSI 300 industry index to conduct the Empirical Analysis. The conclusion shows that the weights of Black-Litterman asset allocation model are balance. The constraint of short sale or the limit of 20% has no effect on the weights of Black-Litterman asset allocation model. No matter the investor's confidence level is 10%,50% or 80%, the returns of portfolio based on Black-Litterman asset allocation model are higher than the market portfolio returns and Markowitz portfolio. And on each confidence level, the Sharpe ratio based on Black-Litterman model is greater than the Sharpe ratios based on market portfolio and the Markowitz portfolio. Therefore, the Black-Litterman model is a more desirable quantitative asset allocation model.