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A derivation of the Black–Litterman formula and its symmetry property

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  • Wey, Matthew A.

Abstract

I present a novel derivation of the Black–Litterman formula by using Theil’s mixed estimator. Additionally, I derive the Black–Litterman formula’s symmetry property. This latter derivation can be used to provide guidance on the estimate of τ. I develop a method to do so and provide a toy asset allocation example.

Suggested Citation

  • Wey, Matthew A., 2023. "A derivation of the Black–Litterman formula and its symmetry property," Economics Letters, Elsevier, vol. 231(C).
    • Handle: RePEc:eee:ecolet:v:231:y:2023:i:c:s0165176523003282
    DOI: 10.1016/j.econlet.2023.111303
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    5. Yugu Xiao & Emiliano A. Valdez, 2015. "A Black-Litterman asset allocation model under Elliptical distributions," Quantitative Finance, Taylor & Francis Journals, vol. 15(3), pages 509-519, March.
    6. S Satchell & A Scowcroft, 2000. "A demystification of the Black–Litterman model: Managing quantitative and traditional portfolio construction," Journal of Asset Management, Palgrave Macmillan, vol. 1(2), pages 138-150, September.
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