The Black-Litterman Model in Detail

Abstract

In this paper we survey the literature on the Black-Litterman model. This survey is provided both as a chronology and a taxonomy as there are many claims on the model in the literature. We provide a complete description of the canonical model including full derivations from the underlying principles using both Theil's Mixed Estimation model and Bayes Theory. The various parameters of the model are considered, along with information on their computation or calibration. Further consideration is given to several of the key papers, with worked examples illustrating the concepts.