Questions tagged [black-litterman]

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Market weights for Black-Litterman

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, ...
5
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2answers
975 views

Black-Litterman: Why should the views be independent of each other?

This question relates to this question. In the Black-Litterman framework views of inverstors on the market are modelled. These views have a covariance-matrix $\Omega$. I always found it quite ...
5
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3answers
2k views

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 ...
5
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2answers
2k views

Black-Litterman, how to choose the uncertainty in the views $\Omega$ for smooth transitions from prior to posterior

In Black-Litterman we get a new vector of expected returns of the form: \begin{align} \Pi_{BL} = \Pi + \underbrace{\tau \Sigma P^T[P\tau\Sigma P^T+\Omega]^{-1}}_{\text{correction}}[Q-P\Pi] \end{align} ...
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2answers
879 views

Is it possible to deal with non-normal distribution in Black-Litterman model?

Suppose that I know that the normality assumption about my data is unrealistic (as it is very frequently): is it possible to apply any distribution that I judge the right one to the Black-Litterman ...
4
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1answer
1k views

Struggling with tau in Black-Litterman

According to the omega formula in B-L tau is used in the Omega estimation to determine the degree of uncertainty given to views of the investor: So, if tau is given a low value then the inverse of ...
3
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1answer
423 views

black litterman for rebalancing

I've noticed in my backtests that "shrinking" the expected returns vector towards zero tends to improve the performance. This has led me to investigate shrinkage methods for the forecasts/expected ...
3
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1answer
1k views

Implied Equilibrium Returns Example

I've been trying to work through a simple example using A Step-by-Step Guide to the Black Litterman Model, but I'm having trouble understanding implied risk aversion. Say I have two uncorrelated ...
3
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1answer
351 views

Black Litterman: Is it possible to have multiple views (from different sources) on the same asset?

From the basics of Black Litterman I understand that each view on a stock is implemented via the pick matrix P with the expected value of the views in Q. I have read several papers where each stock ...
3
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1answer
302 views

Systematic Views in Black-Litterman?

Are there any literature on selecting systematic views for Black-Litterman along with methods to specify the uncertainty parameter? For example, rather than specifying a portfolio manager's subective ...
2
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1answer
537 views

Black-Litterman computation in R - where am I going wrong?

I am trying to compute a small Black Litterman model in R. I am following a Youtube video and translating the excel implementation in R. I have a var cov S matrix ...
2
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1answer
206 views

How to calculate market capitalization weights for a currency portfolio?

I am implementing Black-Litterman optimization on a currency portfolio and I could not calculate market capitalization weights for currencies. Please give me some suggestion.
2
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1answer
566 views

Is an arbitrary prior for Black-Litterman valid? Or do we need a market implied one?

I went through The Black-Litterman Approach: Original Model and Extensions - see also. The BL approeach starts with a prior on the expected returns vector derived from the hypothesis that the market ...
2
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1answer
69 views

relation between risk averson coefficient and maximum Sharp ratio in Black-Litterman context

BL model compute the implied returns based on the reverse optimization where the objective is: $${\underbrace U_{{\rm{investor's \ risk \ utility}}} \buildrel \Delta \over = {\bf{w}}_M^T{\bf{\Pi }} - \...
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0answers
36 views

Black-Litterman Weights for Intersecting Asset Classes

I'm trying to implement Black-Litterman for an arbitrary selection of assets some of which might be subsets or intersect with others. For example, one portfolio might be US Equities (VTI) A global ...
2
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0answers
153 views

Black-Litterman proof with P=I and Omega=tau*Sigma

Elsewhere on this site (link), Richard notes that \begin{equation} \Pi_{BL} = \frac{1}{2} \Pi + \frac{1}{2}Q, \end{equation} so long as we set $ P = I $ (where $I$ is the identity matrix) and $\Omega ...
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0answers
164 views

Black-Litterman implied returns using rolling window

I am building an active risk-based Portfolio with a risk-based Portfolio such as the minimum variance Portfolio as the neutral starting point. Therefore, I calculate the rolling 36 month covariance ...
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0answers
44 views

Black Litterman with strongly skewed/leptokurtic variables

I am trying to apply a BL-like model to a random variable which is strongly skewed and leptokurtic. The random variable is actually the change through time of GARCH conditional variance $\sigma_{t+1}^...
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2answers
111 views

Black-Litterman Weights Don't Change for Assets Without Views

I am using Idzorek 2002 (https://faculty.fuqua.duke.edu/~charvey/Teaching/BA453_2006/Idzorek_onBL.pdf) as a reference to implement the BL model in R. I have specified the model in its standard form, ...
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1answer
271 views

Market Capitalisation Weights for Black-Litterman portfolio

I am implementing the Black Litterman model for a few assets, in particular I am using five ETF: EFA (EAFE stock index: developed markets outside US and Canada) EEM (stocks from Emerging Markets) ...
1
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1answer
2k views

How to generate the views in Black-Litterman model?

I want to apply a Black-Litterman approach for portfolio optimization. My question is how to select investor views? I need to base the choice on a model. I would be thankful if you could give me some ...
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1answer
245 views

Can Black-Litterman-type expected return estimation be used for regional ETFs?

The Black-Litterman approach to return estimation overcomes the problems associated with estimating expected returns via historical averages by determining the equilibrium returns implied by the ...
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1answer
61 views

Rationale for likelihood function parameter choice in Black-Litterman model?

So we are interested in a PDF for equilibrium returns given the views. Why do we choose our view means as the mean parameter and observed market covariance as the covariance parameter? Seems a bit ...
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1answer
237 views

Can I formulate a general relative view in Black-Litterman?

We have often discussed the Black-Litterman approach/model in the forum. What I was wondering is: is it possible to formulate relative views in the model. Relative in the sense $$ \mu_1 > \mu_2 $$ ...
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0answers
104 views

Calculating portfolio weights for Black-Litterman model

I am attempting to construct a portfolio using the step by step Black-Litterman model. My idea is to have a portfolio of, say 10 ETF's (equity based) in one sector and then add some uncorrelated asset ...
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0answers
49 views

Black litterman's formula

Hi just curious where can I find the proofs of Black litterman's first term and second term formula? I don't quite know how exactly they derive the entire formula using inverses of matrix. Thanks!
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0answers
141 views

Black Litterman - numerical instability

I am trying to work out the formula for the posterior mean in Black Litterman's model assuming 100% confidence : Ref: https://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/...
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0answers
368 views

Problems with Black-Litterman: negative portfolio weights, and very poor returns

I am trying to implement the Black-Litterman model using own-defined views matrix (from consensus analysts). However, I have encountered the problems of negative portfolio weights in some periods, and ...
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1answer
137 views

Black-Litterman model with only positive weights

I'm trying to realize Black-Litterman Model for my stocks portfolio, but under optimization, I get a subset of weights with negative values. I want to get only positive weights. IS it possible to add ...
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2answers
125 views

Black-Litterman model - Unable to obtain correct implied weight from implied returns

I'm using Excel 2016 to analyse the ASX200 at June 2012. Out of the ASX200 index, I've found 136 stocks with 5-yr of monthly stock close price data (01 July 2007 - 30 June 2012). I generated monthly ...
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1answer
195 views

Covariance Shrinkage in Black-Litterman Framework

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 ...
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1answer
119 views

Black-Litterman risk aversion

I'm trying to better understand how BL works and what I would like to know if there is a way to adjust the portfolio created based on a risk aversion variable determined by the user. I can't really ...
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1answer
871 views

CVXPY 's constrains doesn't work

I am trying to implement a max return optimization with a large number of assets. I am not sure why this problem won't work. ...
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0answers
105 views

Black-Litterman for quant portfolio

I have seen a lot of research around the Black-Litterman approach and I think theoretically, it is a nice framework. However, it appears that its main strength is from a practitioner's point of view, ...
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0answers
55 views

Index to track my portfolio of all ETFs

I have the following portfolio of all ETFs: I am attempting to apply Black Litterman and on the step of calculating market weights. I have the following questions: How can I define what index to use ...
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0answers
47 views

Labeling Returns in 5 categories based on BL view approach

I have to label a time series of returns into 5 categories based on the Black Litterman view approach. The categories should look as follows: very bullish: + 2 std. dev. bullish: + 1 std. dev. ...
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0answers
873 views

Black-Litterman with simple portfolio

In an attempt to learn Black-Litterman I have come across this "simple" example. Suppose that you analyze market data using CAPM $$r_i-r_f=\beta_i(r_m-r_f)+\epsilon_i$$ Suppose there are 2 assets in ...