A Practical Way to Assess the Confidence Level of a Manager in a Black and Litterman Model

18 Pages Posted: 6 Oct 2011

See all articles by Annalisa Beato

Annalisa Beato

affiliation not provided to SSRN

Luca Ercolani

affiliation not provided to SSRN

Tiziano Novelli

affiliation not provided to SSRN

Date Written: September 6, 2011

Abstract

The aim of this paper is to propose an alternative way to determine the well known confidence parameter c in the Black-Litterman (BL) asset allocation model. Starting at t0 and considering a dynamic BL optimization over time we are able to build a manager confidence function that sets the c value upon the manager’s views. We’ll explain that an endogenous confidence parameter solves the old problem to require views to the manager, together with their ex-ante strength. Following this way we attain a BL model with a reduction of manager’s inputs, without losing the benefits of the BL approach.

Keywords: Black Litterman, confidence, asset allocation

Suggested Citation

Beato, Annalisa and Ercolani, Luca and Novelli, Tiziano, A Practical Way to Assess the Confidence Level of a Manager in a Black and Litterman Model (September 6, 2011). Available at SSRN: https://ssrn.com/abstract=1939798 or http://dx.doi.org/10.2139/ssrn.1939798

Annalisa Beato

affiliation not provided to SSRN ( email )

Luca Ercolani

affiliation not provided to SSRN ( email )

Tiziano Novelli (Contact Author)

affiliation not provided to SSRN ( email )

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