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TEV Sensitivity to Views in Black-Litterman Model

16 Pages Posted: 22 Sep 2007  

Maria Debora Braga Jr.

Università della Valle d'Aosta

Francesco Paolo Natale

Università degli Studi di Milano-Bicocca

Date Written: September 13, 2007

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 Classification: G11, G12

Suggested Citation

Braga, Maria Debora and Natale, Francesco Paolo, TEV Sensitivity to Views in Black-Litterman Model (September 13, 2007). 20th Australasian Finance & Banking Conference 2007 Paper. Available at SSRN: https://ssrn.com/abstract=1009635 or http://dx.doi.org/10.2139/ssrn.1009635

Maria Debora Braga Jr.

Università della Valle d'Aosta ( email )

Strada dei Cappuccini 2A
Aosta, 11100
Italy

Francesco Paolo Natale (Contact Author)

Università degli Studi di Milano-Bicocca ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, Milan 20126
Italy

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