When the tide wanes: A study of post systemic collapse portfolio management

Abstract

This study applies the Black–Litterman model to portfolio management in a post-crisis scenario, where standard parametric models often fail due to market irrationality and investor overreactions. The research focuses on the performance of surviving firms, identifying that over-performing stocks tend to outperform in the medium- to long-term, while under-performing stocks exhibit stronger short-term returns as the market corrects its initial overreaction. The study specifically adjusts views within the Black–Litterman framework using only the top and bottom quartiles of stocks, which experience the most significant shifts during a crisis. By controlling for firm size and book-to-market ratios, consistent with the Fama-French three-factor model, the research demonstrates that adjusting portfolio weights with the Black–Litterman model can achieve substantially higher returns with lower downside risk during recovery periods. These findings have significant implications for portfolio managers seeking to optimize returns in volatile, post-crisis markets.