A Term Structure Model for Expert Opinions

Expert opinions and analyst views are an invaluable source of information for portfolio allocation models, starting with Black and Litterman's seminal work. In this paper, we propose a continuous-time model for the term... [ view full abstract ]

Expert opinions and analyst views are an invaluable source of information for portfolio allocation models, starting with Black and Litterman's seminal work. In this paper, we propose a continuous-time model for the term structure of expert opinions. The model improves on the Black-Litterman in Continuous Time model by providing a flexible characterization of the behavior of expert opinions. We address five key differences between the term structure of interest rates and that of expert opinions. Our diffusion and jump-diffusion models integrate term structure models, expert opinions, behavioral finance, filtering, and risk-sensitive control in a consistent, prescriptive approach to portfolio optimization.