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The Factor Tau in the Black-Litterman Model

14 Pages Posted: 2 Nov 2010 Last revised: 10 Oct 2013

Jay Walters, CFA

Boston University - Metropolitan College - Department of Computer Science

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

Walters, CFA, Jay, The Factor Tau in the Black-Litterman Model (October 9, 2013). Available at SSRN: https://ssrn.com/abstract=1701467 or http://dx.doi.org/10.2139/ssrn.1701467

Jay Walters (Contact Author)

Boston University - Metropolitan College - Department of Computer Science ( email )

United States

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