OToole2013.java
package org.drip.sample.blacklitterman;
import org.drip.numerical.common.FormatUtil;
import org.drip.numerical.linearalgebra.Matrix;
import org.drip.service.env.EnvManager;
/*
* -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
*/
/*!
* Copyright (C) 2020 Lakshmi Krishnamurthy
* Copyright (C) 2019 Lakshmi Krishnamurthy
* Copyright (C) 2018 Lakshmi Krishnamurthy
* Copyright (C) 2017 Lakshmi Krishnamurthy
* Copyright (C) 2016 Lakshmi Krishnamurthy
*
* This file is part of DROP, an open-source library targeting analytics/risk, transaction cost analytics,
* asset liability management analytics, capital, exposure, and margin analytics, valuation adjustment
* analytics, and portfolio construction analytics within and across fixed income, credit, commodity,
* equity, FX, and structured products. It also includes auxiliary libraries for algorithm support,
* numerical analysis, numerical optimization, spline builder, model validation, statistical learning,
* and computational support.
*
* https://lakshmidrip.github.io/DROP/
*
* DROP is composed of three modules:
*
* - DROP Product Core - https://lakshmidrip.github.io/DROP-Product-Core/
* - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
* - DROP Computational Core - https://lakshmidrip.github.io/DROP-Computational-Core/
*
* DROP Product Core implements libraries for the following:
* - Fixed Income Analytics
* - Loan Analytics
* - Transaction Cost Analytics
*
* DROP Portfolio Core implements libraries for the following:
* - Asset Allocation Analytics
* - Asset Liability Management Analytics
* - Capital Estimation Analytics
* - Exposure Analytics
* - Margin Analytics
* - XVA Analytics
*
* DROP Computational Core implements libraries for the following:
* - Algorithm Support
* - Computation Support
* - Function Analysis
* - Model Validation
* - Numerical Analysis
* - Numerical Optimizer
* - Spline Builder
* - Statistical Learning
*
* Documentation for DROP is Spread Over:
*
* - Main => https://lakshmidrip.github.io/DROP/
* - Wiki => https://github.com/lakshmiDRIP/DROP/wiki
* - GitHub => https://github.com/lakshmiDRIP/DROP
* - Repo Layout Taxonomy => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
* - Javadoc => https://lakshmidrip.github.io/DROP/Javadoc/index.html
* - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
* - Release Versions => https://lakshmidrip.github.io/DROP/version.html
* - Community Credits => https://lakshmidrip.github.io/DROP/credits.html
* - Issues Catalog => https://github.com/lakshmiDRIP/DROP/issues
* - JUnit => https://lakshmidrip.github.io/DROP/junit/index.html
* - Jacoco => https://lakshmidrip.github.io/DROP/jacoco/index.html
*
* Licensed under the Apache License, Version 2.0 (the "License");
* you may not use this file except in compliance with the License.
*
* You may obtain a copy of the License at
* http://www.apache.org/licenses/LICENSE-2.0
*
* Unless required by applicable law or agreed to in writing, software
* distributed under the License is distributed on an "AS IS" BASIS,
* WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
*
* See the License for the specific language governing permissions and
* limitations under the License.
*/
/**
* <i>OToole2013</i> reconciles the Outputs of the Black-Litterman Model Process. The References are:
*
* <br><br>
* <ul>
* <li>
* He. G., and R. Litterman (1999): <i>The Intuition behind the Black-Litterman Model Portfolios</i>
* <b>Goldman Sachs Asset Management</b>
* </li>
* <li>
* O'Toole, R. (2013): The Black-Litterman Model: The Risk Budgeting Perspective <i>Journal of Asset
* Management</i> <b>14 (1)</b> 2-13
* </li>
* </ul>
*
* <br><br>
* <ul>
* <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/ProductCore.md">Product Core Module</a></li>
* <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/TransactionCostAnalyticsLibrary.md">Transaction Cost Analytics</a></li>
* <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/README.md">DROP API Construction and Usage</a></li>
* <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/sample/blacklitterman/README.md">Canonical Black Litterman and Extensions</a></li>
* </ul>
* <br><br>
*
* @author Lakshmi Krishnamurthy
*/
public class OToole2013 {
public static final void main (
final String[] astArgs)
throws Exception
{
EnvManager.InitEnv (
"",
true
);
String[] astrG7 = new String[] {
"Australia ",
"Canada ",
"France ",
"Germany ",
"Japan ",
"United Kingdom ",
"United States of America "
};
double[][] aadblG7ExcessReturnsCorrelation = new double[][] {
{1.000, 0.488, 0.478, 0.515, 0.439, 0.512, 0.491},
{0.488, 1.000, 0.664, 0.655, 0.310, 0.608, 0.779},
{0.478, 0.664, 1.000, 0.861, 0.355, 0.783, 0.668},
{0.515, 0.655, 0.861, 1.000, 0.354, 0.777, 0.653},
{0.439, 0.310, 0.355, 0.354, 1.000, 0.405, 0.306},
{0.512, 0.608, 0.783, 0.777, 0.405, 1.000, 0.652},
{0.491, 0.779, 0.668, 0.653, 0.306, 0.652, 1.000}
};
double[] adblG7ExcessReturnsVolatility = new double[] {
0.160,
0.203,
0.248,
0.271,
0.210,
0.200,
0.187
};
double[] adblG7BenchmarkWeight = new double[] {
0.016,
0.022,
0.052,
0.055,
0.116,
0.124,
0.615
};
double[] adblG7ImpliedReturnsReconciler = new double[] {
0.0394,
0.0692,
0.0836,
0.0903,
0.0430,
0.0677,
0.0756
};
double dblDelta = 2.5;
double[][] aadblG7Covariance = new double[astrG7.length][astrG7.length];
for (int i = 0; i < astrG7.length; ++i) {
for (int j = 0; j < astrG7.length; ++j)
aadblG7Covariance[i][j] = aadblG7ExcessReturnsCorrelation[i][j] * adblG7ExcessReturnsVolatility[i] * adblG7ExcessReturnsVolatility[j];
}
double[] adblG7ImpliedReturns = Matrix.Product (
aadblG7Covariance,
adblG7BenchmarkWeight
);
System.out.println ("\n\t|-----------------------------------------------------------------------------------||");
System.out.println ("\t| G7 CORRELATION MATRIX INPUT ||");
System.out.println ("\t|-----------------------------------------------------------------------------------||");
for (int i = 0; i < astrG7.length; ++i) {
String strDump = "\t| " + astrG7[i] + " ";
for (int j = 0; j < astrG7.length; ++j)
strDump += "|" + FormatUtil.FormatDouble (aadblG7ExcessReturnsCorrelation[i][j], 1, 3, 1.) + " ";
System.out.println (strDump + "||");
}
System.out.println ("\t|-----------------------------------------------------------------------------------||\n");
System.out.println ("\t|-----------------------------------------------------------------------------------||");
System.out.println ("\t| G7 COVARIANCE MATRIX INPUT ||");
System.out.println ("\t|-----------------------------------------------------------------------------------||");
for (int i = 0; i < astrG7.length; ++i) {
String strDump = "\t| " + astrG7[i] + " ";
for (int j = 0; j < astrG7.length; ++j)
strDump += "|" + FormatUtil.FormatDouble (aadblG7Covariance[i][j], 1, 3, 1.) + " ";
System.out.println (strDump + "||");
}
System.out.println ("\t|-----------------------------------------------------------------------------------||\n");
System.out.println ("\t||----------------------------------------------||");
System.out.println ("\t|| BENCHMARK WEIGHT AND RETURNS VOLATILITY ||");
System.out.println ("\t||----------------------------------------------||");
System.out.println ("\t|| ASSET CLASS => WEIGHT | VOL ||");
System.out.println ("\t||----------------------------------------------||");
for (int i = 0; i < astrG7.length; ++i)
System.out.println (
"\t|| " + astrG7[i] + " => " +
FormatUtil.FormatDouble (adblG7BenchmarkWeight[i], 2, 1, 100.) + "% | " +
FormatUtil.FormatDouble (adblG7ExcessReturnsVolatility[i], 2, 1, 100.) + "% ||"
);
System.out.println ("\t||----------------------------------------------||\n");
System.out.println ("\t||----------------------------------------------||");
System.out.println ("\t|| RISK PREMIUM IMPLIED RETURNS ||");
System.out.println ("\t||----------------------------------------------||");
System.out.println ("\t|| ASSET CLASS => OUTPUT | PAPER ||");
System.out.println ("\t||----------------------------------------------||");
for (int i = 0; i < adblG7ImpliedReturns.length; ++i)
System.out.println (
"\t|| " + astrG7[i] + " => " +
FormatUtil.FormatDouble (dblDelta * adblG7ImpliedReturns[i], 1, 2, 100.) + "% | " +
FormatUtil.FormatDouble (adblG7ImpliedReturnsReconciler[i], 1, 2, 100.) + "% ||"
);
System.out.println ("\t||----------------------------------------------||\n");
EnvManager.TerminateEnv();
}
}