IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v13y2012i1d10.1057_jam.2011.25.html
   My bibliography  Save this article

Active risk sensitivity to views using the Black–Litterman model

Author

Listed:
  • Maria Debora Braga

    (University of Valle d’Aosta)

  • Francesco Paolo Natale

Abstract

In this article, we introduce a new measure for the marginal contribution of each view to the expected tracking error volatility (TEV). Our findings are obtained in the Bayesian framework proposed by Black and Litterman (1990, 1992) considering both a world with and without constraints in the optimization process. We believe that the issue of TEV sensitivity to the views can be of considerable interest to the investment management community for several reasons as it (1) provides the portfolio manager with a method for revising the portfolio consistently with a given TEV constraint or for better understanding its impact on asset exposures; (2) makes investment specialists responsible for the generation process of the views; (3) creates the basis for a procedure to examine a request from the asset managers to expand the relative risk budget. We provide an empirical investigation illustrating how our new measure can be implemented to modify a set of given views to achieve a TEV goal.

Suggested Citation

  • Maria Debora Braga & Francesco Paolo Natale, 2012. "Active risk sensitivity to views using the Black–Litterman model," Journal of Asset Management, Palgrave Macmillan, vol. 13(1), pages 5-21, February.
    • Handle: RePEc:pal:assmgt:v:13:y:2012:i:1:d:10.1057_jam.2011.25
    DOI: 10.1057/jam.2011.25
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/jam.2011.25
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/jam.2011.25?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Best, Michael J & Grauer, Robert R, 1985. "Capital Asset Pricing Compatible with Observed Market Value Weights," Journal of Finance, American Finance Association, vol. 40(1), pages 85-103, March.
    2. B Scherer, 2001. "A note on tracking error funding assumptions," Journal of Asset Management, Palgrave Macmillan, vol. 2(3), pages 235-240, December.
    3. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Frieder Meyer-Bullerdiek, 2021. "Out-of-sample performance of the Black-Litterman model," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 10(2), pages 1-2.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Flori, Andrea, 2019. "News and subjective beliefs: A Bayesian approach to Bitcoin investments," Research in International Business and Finance, Elsevier, vol. 50(C), pages 336-356.
    2. Thomas J. Brennan & Andrew W. Lo, 2010. "Impossible Frontiers," Management Science, INFORMS, vol. 56(6), pages 905-923, June.
    3. Kolm, Petter N. & Tütüncü, Reha & Fabozzi, Frank J., 2014. "60 Years of portfolio optimization: Practical challenges and current trends," European Journal of Operational Research, Elsevier, vol. 234(2), pages 356-371.
    4. Hlouskova, Jaroslava & Lee, Gabriel S., 2001. "Legal Restrictions on Portfolio Holdings: Some Empirical Results," Economics Series 93, Institute for Advanced Studies.
    5. Wolfgang Bessler & Georgi Taushanov & Dominik Wolff, 2021. "Factor investing and asset allocation strategies: a comparison of factor versus sector optimization," Journal of Asset Management, Palgrave Macmillan, vol. 22(6), pages 488-506, October.
    6. Wey, Matthew A., 2023. "A derivation of the Black–Litterman formula and its symmetry property," Economics Letters, Elsevier, vol. 231(C).
    7. Frank Z. Xing & Erik Cambria & Lorenzo Malandri & Carlo Vercellis, 2018. "Discovering Bayesian Market Views for Intelligent Asset Allocation," Papers 1802.09911, arXiv.org, revised Jun 2018.
    8. Zhao, Daping & Bai, Lin & Fang, Yong & Wang, Shouyang, 2022. "Multi‐period portfolio selection with investor views based on scenario tree," Applied Mathematics and Computation, Elsevier, vol. 418(C).
    9. Leon (Liang) Xin & Shanshan Ding, 2021. "Expected returns with leverage constraints and target returns," Journal of Asset Management, Palgrave Macmillan, vol. 22(3), pages 200-208, May.
    10. Kolm, Petter & Ritter, Gordon, 2017. "On the Bayesian interpretation of Black–Litterman," European Journal of Operational Research, Elsevier, vol. 258(2), pages 564-572.
    11. David Ardia & Kris Boudt, 2013. "Implied Expected Returns and the Choice of a Mean-Variance Efficient Portfolio Proxy," Cahiers de recherche 1328, CIRPEE.
    12. Frieder Meyer-Bullerdiek, 2021. "Out-of-sample performance of the Black-Litterman model," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 10(2), pages 1-2.
    13. Erindi Allaj, 2013. "The Black–Litterman model: a consistent estimation of the parameter tau," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(2), pages 217-251, June.
    14. Humberto Valencia Herrera, 2011. "Value at Risk and Return from the Use of Bayesian Methods for Stress Testing in a World Asset Allocation and the 2008-2009 Crisis," Revista de Administración, Finanzas y Economía (Journal of Management, Finance and Economics), Tecnológico de Monterrey, Campus Ciudad de México, vol. 5(1), pages 33-49.
    15. Rudi Zagst & Michaela Pöschik, 2008. "Inverse portfolio optimisation under constraints," Journal of Asset Management, Palgrave Macmillan, vol. 9(3), pages 239-253, September.
    16. Grauer, Robert R. & Janmaat, Johannus A., 2009. "On the power of cross-sectional and multivariate tests of the CAPM," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 775-787, May.
    17. Diacogiannis, George & Ioannidis, Christos, 2022. "Linear beta pricing with efficient/inefficient benchmarks and short-selling restrictions," International Review of Financial Analysis, Elsevier, vol. 81(C).
    18. Bessler, Wolfgang & Taushanov, Georgi & Wolff, Dominik, 2021. "Optimal asset allocation strategies for international equity portfolios: A comparison of country versus industry optimization," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    19. Alejandro Corvalán, 2005. "Mixed Tactical Asset Allocation," Working Papers Central Bank of Chile 323, Central Bank of Chile.
    20. Davide Benedetti & Enrico Biffis & Fotis Chatzimichalakis & Luciano Lilloy Fedele & Ian Simm, 2021. "Climate change investment risk: optimal portfolio construction ahead of the transition to a lower-carbon economy," Annals of Operations Research, Springer, vol. 299(1), pages 847-871, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:13:y:2012:i:1:d:10.1057_jam.2011.25. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.