The Factor Tau in the Black-Litterman Model
14 Pages Posted: 2 Nov 2010 Last revised: 10 Oct 2013
Date Written: October 9, 2013
Abstract
This paper considers the factor tau (τ) in the Black-Litterman model. τ is one of the more confusing aspects of the model, as authors provide contradictory information regarding its use and calibration. We will consider the origin of the mixed-estimation model used in the Black-Litterman Model so that we can develop a richer understanding of τ and its place in the model. We will discuss the various models which use the name Black-Litterman and how they do or do not use τ. Finally, we will show several ways to calibrate τ when using the canonical Black-Litterman model.
Keywords: Black-Litterman Model, Bayes, Asset Allocation
JEL Classification: C1, G11
Suggested Citation: Suggested Citation
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