Diversification with international assets and cryptocurrencies using Black-Litterman

Abstract

PurposeThe aim of the study was to analyze the performance of Black-Litterman (BL) portfolios using a views estimation procedure that simulates investor forecasts based on technical analysis.Design/methodology/approachIbovespa, S&P500, Bitcoin and interbank deposit rate (IDR) indexes were respectively considered proxies for the national, international, cryptocurrency and fixed income stock markets. Forecasts were made out of the sample aiming at incorporating them in the BL model, using several portfolio weighting methods from June 13, 2013 to August 30, 2022.FindingsThe Sharpe, Treynor and Omega ratios point out that the proposed model, considering only variable return assets, generates portfolios with performances superior to their traditionally calculated counterparts, with emphasis on the risk parity portfolio. Nonetheless, the inclusion of the IDR leads to performance losses, especially in scenarios with lower risk tolerance. And finally, given the impact of turnover, the naive portfolio was also detected as a viable alternative.Practical implicationsThe results obtained can contribute to improve investors practices, specifically by validating both the performance improvement – when including foreign assets and cryptocurrencies –, and the application of the BL model for asset pricing.Originality/valueThe main contributions of the study are: performance analysis incorporating cryptocurrencies and international assets in an uncertain recent period; the use of a methodology to compute the views simulating the behavior of managers using technical analysis; and comparing the performance of portfolio management strategies based on the BL model, taking into account different levels of risk and uncertainty.

Guest editorial: Special issue: Applications of artificial intelligence and machine learning in business, finance and economics

“…Still in the realm of financial markets, the paper by Pereira Alves de Abreu and Iquiapaza (2024), entitled “Diversification with international assets and cryptocurrencies using Black-Litterman,” studied the performance of Black-Litterman portfolios composed of national, international and cryptocurrency assets for investors in an emerging market. The suggested approach uses an estimation procedure that simulates investor forecasts based on technical analysis.…”