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I'm trying to implement Black-Litterman for an arbitrary selection of assets. One of the input for BL is the "Equilibrium market capitalization weights for each asset". In most examples I've seen, the assets are represented by different market sector so the market capitalization is based on the sector share.

What should I use as market weight for an arbitrary selection of assets (stocks, bonds etc)?

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  • $\begingroup$ Could you give at least one reference for what you describe as "most examples"? Thank you. $\endgroup$ – vonjd Feb 26 '13 at 14:39
  • $\begingroup$ Well, its not easy to find good examples, but here are some: jpmorgan.com/tss/General/… r-bloggers.com/black-litterman-model stat.berkeley.edu/~nolan/vigre/reports/Black-Litterman.pdf $\endgroup$ – Bjorn Feb 26 '13 at 15:02
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    $\begingroup$ It can be difficult to obtain market capitalization for some types of assets. Instead, you can use the weights to an arbitrary benchmark portfolio. That would be like backing out the returns that would result in you investing in the benchmark portfolio if you don't have any views. $\endgroup$ – John Feb 26 '13 at 15:09
  • $\begingroup$ Sounds good. That is sort of what I'm doing now in my implementation, so I guess I was a bit on track. Btw, I think you should post your answer as an answer rather than a comment (so that you can be upvoted and accepted etc) $\endgroup$ – Bjorn Feb 27 '13 at 12:08
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For Black-Litterman you need to have weights of the market portfolio, or a close benchmark, where you know the asset allocation. The common approach in practice is to find a large fund with a low tracking error for your investment universe.

Depending on your goal it may be enough to have the allocation over classes of your fund, which will allow you to extract expected returns for the subclasses, rather than individual securities. One way I have seen in practice is to use the endowment funds of Harvard, Yale, etc., as there is some data available (from their investment offices). That is the reason you rarely see a more specific implementation, just like you describe.

So the point remains, you need to find some asset allocation for the market portfolio.

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It can be difficult to obtain market capitalization for some types of assets. Instead, you can use the weights to an arbitrary benchmark portfolio. That would be like backing out the returns that would result in you investing in the benchmark portfolio if you don't have any views.

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