TEV Sensitivity to Views in Black-Litterman Model

Abstract:     
In this paper we propose a new measure for the marginal contribution of each view to the ex-ante tracking error volatility (TEV).

The issue of the TEV sensitivity to the views is relevant for several purposes: 1. provide the asset managers with a method for revising the portfolio consistently with a given TEV constraint; 2. Make the specialists responsible for the generation process of the views; 3. set a mechanism to connect the incentive fees not only to the excess return but also to the marginal contribution of each view to the TEV.

We provide also an empirical investigation in the Black-Litterman framework in order to modify the views to achieve a TEV goal.

Keywords: Black-Litterman, TEV, marginal contribution, views, sensitivity

JEL Classifications: G11, G12

Working Paper Series