Good evening guys
I am looking into the effects of covariance shrinkage on the diversification of asset weights for different portfolio optimisations. Initially, I was interested to see how it affects classic mean-variance, but I now digged into risk-parity and Black-Litterman.
Long story short: where should I apply the shrinkage in the case of Black-Litterman? I would assume to shrink the covariance matrix that goes into the Black-Litterman model in order to get mu_BL and sigma_BL. Alternatively, I thought I could run BL without any shrinkage, and then shrink the resulting sigma_BL? Does anybody have a view on this?
Otherwise, I wish you a happy weekend (and happy July 4th for the American friends).