Copula Opinion Pooling (Extension to Black-Litterman)

Asymmetry and the presence of heavy tails have been prominent empirical findings in financial asset returns. Furthermore, the volatility clustering effect is a salient feature in the data, where calm periods are generally followed by highly volatile periods and vice versa. Portfolio strategies should be flexible enough to take these dynamics into account.

Attilio Meucci has extended the Black-Litterman approach to include non-normal market environments (return distributions that account for observed fat-tails, skewness and high dependence among extreme events). Meucci uses opinion pooling criteria to determine the marginal distribution of each view separately.

The copula models joint co-dependence of the views and is derived from the prior market structure. It is possible to translate the joint distribution of views into a joint posterior for the market through an appropriate change of coordinates.