# What is the tau parameter in the Black-Litterman model?

Could someone please provide me with a clear and concise definition of the $\tau$ parameter in the Black-Litterman model? It seems one is rather hard to come by. I understand it to be the 'weight on views', but this is a little vague.

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I collected some papers, possibly you already know them. Are they helpful? Do you want a more specific insight? – Bob Jansen Jun 14 '14 at 13:04
I am aware of Meucci's paper - but the other ones not at all. The step-by-step guide looks promising though, thank you. – Ryan Jun 15 '14 at 5:28

I don't believe there is one generally accepted method and a number of papers are written on this issue.

The Black-Litterman Approach: Original Model and Extensions (2008) by Meucci has an overview and I believe is generally useful to learn more. It suggests using $\tau = \frac{1}{T}$ but notes more complicated approaches exist. A demystification of the Black–Litterman model: Managing quantitative and traditional portfolio construction (2000) by Satchell Scowcroft "propose an ingenious model where $\tau$ is stochastic, but extra parameters need to be calibrated." (Meucci). The Black Litterman Model: A Detailed Exploration (2008) by Walters gives another overview. Of course, you can't miss Idzoreks A step-by-step guide to the Black-Litterman model (2004). This blog might also be of interest.

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Jay Walter's Paper on "The Factor Tau in the Black-Litterman Model" http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1701467 is also useful to review

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Thank you for bringing this paper to my attention. – Ryan Jun 15 '14 at 5:26

There is also http://www.blacklitterman.org/ Where you can find an implementation under Excel and Matlab of the Model.

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