Diversification with international assets and cryptocurrencies using Black-Litterman

Abstract

Purpose: The 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/approach: Ibovespa, 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. Findings: The 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 implications: The 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/value: The 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.