Multifactor Model Reverse Optimization
Stuart School of Business research presentation by: Associate Professor of Finance Ricky Cooper and Industry Assistant Professor of Management Science Seung Youn Cha
Multifactor Model Reverse Optimization
- Associate Professor of Finance Ricky Cooper
- Industry Assistant Professor of Management Science Seung Youn Cha
Abstract:
One of the major uses of the CAPM model in industry is the concept known as reverse optimization. Using the CAPM model to intuit the markets expectations of returns is the foundation of a widely used technique known as Black-Litterman return forecasting. Unfortunately, the reverse optimization returns are not accurate. Many improvements have been suggested but no previous research has suggested a fundamental improvement, namely begin with a more robust framework. This research uses the intertemporal, multi-factor framework of Merton to develop a more robust reverse optimization methodology that can explain real returns better, and allows for a wider variety of assets to be modeled correctly.
All Illinois Tech faculty, students, and staff are invited to attend.
The Friday Research Presentations series showcases ongoing academic research projects conducted by Stuart School of Business faculty and students, as well as guest presentations by Illinois Tech colleagues, business professionals, and faculty from other leading business schools.