Quantitative Portfolio Construction and Systematic Trading Strategies using Factor Entropy Pooling

The Entropy Pooling approach is a versatile theoretical framework to process market views and generalised stress-tests into an optimal “posterior” market distribution, which is then used for risk management and portfolio management. Entropy Pooling can be implemented non-parametrically or parametrically. The non-parametric implementation with historical scenarios is more suitable for risk management applications. Here we introduce the parametric implementation of Entropy Pooling under a factor structure, which we name Factor Entropy Pooling. The factor structure reduces the dimension of the problem and linearises the parameter space, allowing for fast computation of the posterior market distribution.