Implementing Black-Litterman Model Using Analyst Recommendations: Evidence from Russia

This paper presents a detailed theoretical and empirical analysis of the Black—Litterman model based on the Russian stock market data during the 2015-2017 period. Theoretical analysis resulted in a detailed description of the model parameters, methods of their specification and influence on the behaviour of the model. Using analysts’ recommendations as views, the model was specified and tested on the stocks included into MOEX Russia index. The testing of the model showed that once accounted for transaction costs, the Black—Litterman model appears to be inferior to benchmark portfolios and does not significantly exceed the results of the classic Markowitz model due to high portfolio turnover and sensitivity to the specification of views. This work appears to be the first to present a detailed description of the model specification process and provide a testing of the model on the Russian stock market. Hence, this study can serve as a practical guide for investors who would want to implement Black—Litterman model on Russian stock market.