7
votes
Accepted
Is it possible to deal with non-normal distribution in Black-Litterman model?
Well there are two main things to consider here.
Many implementation of Black-Litterman use the market portfolio and the ex post volatility and correlation structure to back out implied returns to ...
- 2,874
5
votes
Accepted
Black-Litterman computation in R - where am I going wrong?
I had a quick look at your code and it seems like you are applying the inverse function incorrectly in your calculations. For example, in the ...
- 1,708
4
votes
Accepted
Black-Litterman: Why should the views be independent of each other?
It depends on your investment process: more specifically, on how you generate views. Here are three practical cases which lead to different choices for $\Omega$:
Let's assume you are an investor who ...
- 866
4
votes
Accepted
Struggling with tau in Black-Litterman
Your statement about the properties of $\tau$ is correct. $\tau$ is a measure of uncertainty. I think the problem you are having is because in most practical situations nobody really knows what values ...
- 1,356
4
votes
Accepted
black litterman for rebalancing
There are some technical problems with using your previous weights as priors (that is, they are point measures), but yes, the Black-Litterman framework is suitable for this. You can essentially ...
- 707
3
votes
Accepted
Black-Litterman model with only positive weights
The problem is not Black-Litterman.
B-L aims at finding an estimation of expected return based on a prior objective and some views.
The prior is based on market neutral portfolio composition (or your ...
- 314
3
votes
Accepted
Market Capitalisation Weights for Black-Litterman portfolio
Do not use the capitalizations of the ETFs, they hold a small and variable proportion of the securities outstanding.
Instead base your weights on the papers by Swinkels et al. which have tried to ...
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3
votes
Accepted
How to generate the views in Black-Litterman model?
Any potential source of "alpha" would suffice, in fact. And your research would be research of how this "alpha" source is able to produce alpha. On my mind, candidates could be
(1) some well-...
3
votes
How to calculate market capitalization weights for a currency portfolio?
Currency indices will require some base currency from which the other currencies weights will be determined. Also, the weights are determined as of some point in time and frequency, and are based on ...
- 5,010
3
votes
Accepted
Implied Equilibrium Returns Example
It's because the model assumes that the market will maximize its Sharpe ratio and your weights don't do that. Essentially, your example assumes investors are irrational in their allocation. If you ...
- 518
3
votes
Accepted
Black-Litterman, how to choose the uncertainty in the views $\Omega$ for smooth transitions from prior to posterior
In practice, $\Omega$ (the covariance of the investor views) often 'inherits' the market covariance $\Sigma$. A convenient choice is
$ \Omega = \left( 1/c -1 \right) P \Sigma P^T$
where $c$ is a ...
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3
votes
Accepted
Is an arbitrary prior for Black-Litterman valid? Or do we need a market implied one?
Of course you can choose the prior. As far as I understand the literature, the BL-model is characterized by using the equilibrium implied returns. Otherwise it would just be a Bayesian model.
If you ...
- 2,874
3
votes
What is the tau parameter in the Black-Litterman model?
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
3
votes
Black-Litterman: Why should the views be independent of each other?
In The Black-Litterman Model In Detail Jay Walters says the following on p. 13 (top paragraph):
First, by construction we will require each view to be unique and uncorrelated with the other views. ...
- 473
2
votes
Systematic Views in Black-Litterman?
Yes, you can formulate such a view. A lot of ways to formulate views are described in the literature (one can start here). However, your view is based on the assumption that CAPM works precisely for ...
- 13.2k
2
votes
Black-Litterman, how to choose the uncertainty in the views $\Omega$ for smooth transitions from prior to posterior
When I implemented a BL model, I chose to do the omega optimization using the technique Idzorek proposed here:
https://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/...
- 1,122
2
votes
Accepted
What is the tau parameter in the Black-Litterman model?
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 ...
- 7,598
2
votes
Can Black-Litterman-type expected return estimation be used for regional ETFs?
Under the logic of the CAPM, the equation $\operatorname{E}[R_i - R_f] = \beta_i \operatorname{E}[R_m - R_f]$ would hold for any return, whether it's a stock return, bond return, portfolio return, ...
- 6,294
2
votes
Black Litterman: Is it possible to have multiple views (from different sources) on the same asset?
This issue is dealt in detail in Atillio Meucci's paper titled Fully Flexible Views: Theory and Practice. See Appendix A.4.
- 103
2
votes
Accepted
relation between risk averson coefficient and maximum Sharp ratio in Black-Litterman context
Solving it algebraically:
As seen in the above provided reference (just above " 1) "), the general formulation for the unconstrained Markowitz portfolio optimization scheme, is given by:
\...
- 3,263
2
votes
Black-Litterman Weights Don't Change for Assets Without Views
So, in short, you've told BL that Exxon sucks, but you haven't specified the same for Chevron or Conoco! So the model sells XOM, but maintains the longs in the others given the more attractive pairs-...
- 4,886
1
vote
Black-Litterman Weights Don't Change for Assets Without Views
Is there a way to specify BL such that asset classes without views have flexible weights?
Black-Litterman has uncertainties on its views as well, so if you increase uncertainties for some highly ...
- 14.4k
1
vote
Black-Litterman model - Unable to obtain correct implied weight from implied returns
This is a good resource for calculation of BL in Python, personally I find that Excel isn't great for this sort of thing.
https://medium.com/analytics-vidhya/black-litterman-model-for-asset-allocation-...
- 73
1
vote
Accepted
Covariance Shrinkage in Black-Litterman Framework
Yes all you have to do is estimate the Black Litterman covariance matrix that includes investor views using a shrinkage estimator. Covariance shrinkage like Ledoit Wolf is an old technique, however, ...
- 2,815
1
vote
Rationale for likelihood function parameter choice in Black-Litterman model?
Since you add the bayes-theory tag here I'm gonna speak in bayesian interpretation; I'd say it's just because this is the simplest way to obtain the distribution of prior; A better way to do this is ...
- 609
1
vote
Black-Litterman risk aversion
intuitively BL works as assuming return (can be factor return defined in APT model or return over some interval) follows normal distribution with mean $E$ and variance $V$, we want to infer such mean ...
- 609
1
vote
CVXPY 's constrains doesn't work
You forgot to include constraints as a parameter to the call to Problem.
- 7,598
1
vote
Accepted
Can I formulate a general relative view in Black-Litterman?
Indeed I think you can, but it comes at a price. To be clear: Neither have I done this myself nor have I attempted it.
The main idea is typical Bayesian:
In computing the posterior return parameters ...
- 2,874
1
vote
What is the tau parameter in the Black-Litterman model?
There is also http://www.blacklitterman.org/ Where you can find an implementation under Excel and Matlab of the Model.
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